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IKOIAWA  UNIVtRSlTY 

MAY  2  21987 

SCHQOl  CF  lAW-taOPlS. 


law 
Review 


Volume  19  No.  4  1986 


SYMPOSIUM  ON  FINANCING  AND  REGULATING 

HEALTH  CARE  SERVICES:  HARD  CHOICES  AND 

ETHICAL  DILEMMAS 

Coverage  and  Care  for  the  Medically  Indigent:  Public  and  Private  Options 

Randall  R.  Bovbjerg  &  William  G.  Kopit 

State  Hospital  Cost  Containment:  An  Analysis  of  Legislative  Initiatives 

Carl  J.  Schramm 

Liver  Transplantation  in  Massachusetts:  Public  Policymaking  as  Morality 
Play 

Clark  C.  Havig hurst  &  Nancy  M.  P.  King 

The  Lithotripsy  Game  in  North  Carolina:  A  New  Technology  Under 
Regulation  and  Deregulation 

Clark  C.  Havighurst  &  Robert  S.  McDonough 

Full  Circle:  The  Return  of  Certificate  of  Need  Regulation  of  Health  Facilities 
to  State  Control 

James  B.  Simpson 

Reform  Revisited:  A  Review  of  the  Indiana  Medical  Malpractice  Act  Ten 
Years  Later 

James  D.  Kemper  &  Myra  C.  Selby  &  Bonnie  K.  Simmons 

Making  Hard  Choices  Under  the  Medicare  Prospective  Payment  System:  One 
Administrative  Model  for  Allocating  Medical  Resources  Under  a 
Government  Health  Insurance  Program 

Eleanor  D.  Kinney 

Bowen  v.  American  Hospital  Association:  Federal  Regulation  Is  Powerless 
to  Save  Baby  Doe 

Dennis  F.  Cantrell 

NOTE 

Denying  Hospital  Privileges  to  Non-Physicians:  Does  Quality  of  Care  Justify 
a  Potential  Restraint  of  Trade? 


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Developments  in  Indiana  Law 

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Indiana  luai^  Revieiv 

Volume  19  1986  Number  4 

Copyright    C^J    1986  by  the  Trustees  of    Indiana  University 


TABLE  OF  CONTENTS 

SYMPOSIUM  ON  FINANCING  AND  REGULATING 
HEALTH  CARE  SERVICES 

Foreword Eleanor  D.  Kinney 

Barbara  McCarthy  Green      853 

ARTICLES 

Coverage  and  Care  for  the  Medically  Indigent: 

Public  and  Private  Options Randall  R.  Bovbjerg 

William  G.  Kopit      857 

State  Hospital  Cost  Containment:  An  Analysis  of 
Legislative  Initiatives Carl  J.  Schramm      919 

Liver  Transplantation  in  Massachusetts:  Public  Policymaking 

as  Morality  Play Clark  C.  Havighurst 

Nancy  M.  P.  King      955 

The  Lithrotripsy  Game  in  North  Carolina:  A  New  Technology 

Under  Regulation  and  Deregulation Clark  C.  Havighurst 

Robert  S.  McDonough      989 

Full  Circle:  The  Return  of  Certificate  of  Need  Regulation 
of  Health  Facilities  to  State  Control James  B.  Simpson     1025 

Reform  Revisited:  A  Review  of  the  Indiana  Medical 

Malpractice  Act  Ten  Years  Later James  D.  Kemper 

Myra  C.  Selby 
Bonnie  K.  Simmons     1129 


Volume  19  Fall  1986  Number  4 

The  INDIANA  LAW  REVIEW  (ISSN  0090-4198)  is  the  property  of  Indiana  University  and  is  published  quarterly  by 
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POSTMASTER:  Send  address  changes  to  INDIANA  LAW  REVIEW,  735  West  New  York  Street,  Indianapolis, 
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Making  Hard  Choices  Under  the  Medicare  Prospective  Payment 
System:  One  Administrative  Model  for  Allocating  Medical 
Resources  Under  a  Government  Health  Insurance  Program 
Eleanor  D.   Kinney     1151 

Bowen  v.  American  Hospital  Association:  Federal  Regulation  Is 

Powerless  to  Save  Baby  Doe Dennis  F.  Cantrell    1199 

NOTE 

Denying  Hospital  Privileges  to  Non-Physicians:  Does 
Quality  of  Care  Justify  a  Potential  Restraint  of  Trade? 1219 


Indiana 

La^iv  R 

eviep 

Volume  19 

1986 

Editor-in-Chief 

I 

Debra  D.  McVicker 

Executive  Editors 

Articles  and  Production                      Notes  and  Topics 

Mary  Arlien  Findling 

Dennis  F.  Cantrell 

Articles  Editors 

Jerry  A.  Garau 

Cathleen  Johnson  Perry 

Douglas  Westfall  Holly                          Michael  B.  Watkins 

Brian  L.  Woodward 

Business  Editor 

John  Gardner 

Note  and  Development  Editof 

•s 

David  C.  Bransdorfer 

Michael 

Patrick  Maxwell 

Mary  Beth  Claus 

Ellen  C. 

Siakotos 

Herbert  O.  Hintze,  Jr 

Andrew 

P.  Wirick 

Associate  Editors 

Vivian  K.  Aichele 

Elizabeth  R.  Gingerich 

Mark  A.  Bailey 

Douglas  E.  Greer 

Curtis  Alan  Baldwin 

Brian  K 

Hugen 

Arthur  R.  Baxter 

Larry  R 

.  Jackson 

Jan  Barteau  Berg 

Todd  J. 

Kaiser 

Philip  A.  Book 

Mark  A 

.  Kapouraios 

Hilary  A.  Bowe 

Sally  A. 

Kendall 

Laura  L.  Bowker 

Andrew 

A.  Kleiman 

Susan  D.  Burke 

Gary  W 

.  Larson 

Gregory  M.  Cole 

Susan  D 

.  Rafferty 

Kathryn  J.  Cook 

Jeffrey  A.  Riggs 

Robert  T.  Drew 

Patricia  L.  Sosbe 

Lucy  A.  Emison 

Lori  A. 

Torres 

Michael  J.  Gabovitch 

Judy  L. 
Peter  C.  Wright 

Woods 

Editorial  Assistant 

Mary  J.  Deschler 

Faculty  Advisor 
Paul  J.  Galanti 


Indiana  University  School  of  Law — Indianapolis 
1985-86  ADMINISTRATIVE  OFFICERS  AND  FACULTY 

Administrative  Officers 

John  W.  Ryan,  Ph.D.,  President  of  the  University 

Glenn  W.  Irwin,  Jr.,  M.D.,  Vice-President 

Gerald  L.  Bepko,  LL.M.,  Dean 

James  F.  Bindley,  J.D.,  Assistant  Dean  for  Administration 

G.  Kent  Frandsen,  J.D.,  Associate  Dean  for  Student  Affairs 

Jeffrey  W.  Grove,  J.D.,  Associate  Dean  for  Academic  Affairs 

Faculty 

Thomas  B.  Allington,  Professor.  B.S.,  University  of  Nebraska,  1964;  J.D.,  1966;  LL.M., 
New   York  University,   197 L 

Edward  P.  Archer,  Professor.  B.M.E.,  Rensselaer  Polytechnic  Institute,  1958;  J.D.,  George- 
town University,   1962;  LL.M.,   1964. 

James  F.  Bailey,  III.,  Associate  Professor  and  Director  of  Law  Library.  A.B.,  University  of 
Michigan,  1961;  J.D.,  1964;  M.A.L.S.,  1970. 

Gerald  L.  Bepko,  Dean  and  Professor.  B.S.,  Northern  Illinois  University,  1962;  J.D., 
IIT/Chicago-Kent  College  of  Law,  1965;  LL.M.,  Yale  University  1972. 

James  F.  Bindley,  Assistant  Dean  for  Administration  and  Lecturer  in  Law.  B.A.,  Loyola 
University,   1969;  J.D.,   University  of  Kentucky,   1972. 

Paul  N.  Cox,  Visiting  Professor.  B.S.,  Utah  State  University,  1971;  J.D.,  University  of 
Utah,   1974;  LL.M.,   University  of  Virginia,   1980. 

Clyde  Harrison  Crockett,  Professor.  A.B.,  University  of  Texas,  1962;  J.D.,  1965;  LL.M., 
University  of  London  (The  London  School  of  Economics  and  Political  Science),  1972. 

Debra  a.  Falender,  Professor.  A.B.,  Mount  Holyoke  College,  1970;  J.D.,  Indiana  Univer- 
sity,  1975. 

G.  Kent  Frandsen,  Associate  Dean  for  Student  Affairs  and  Associate  Professor.  B.S.,  Bradley 
University,  1950;  J.D.,  Indiana  University,  1965. 

David  A.  Funk,  Professor.  A.B.,  College  of  Wooster,  1949;  J.D.,  Case  Western  Reserve  Univer- 
sity, 1951;  M.A.,  The  Ohio  State  University  1968;  LL.M.,  Case  Western  Reserve  Univer- 
sity, 1972;  LL.M.,  Columbia  University,  1973. 

Paul  J.  Galanti,  Professor.  A.B.,  Bowdoin  College,  1960;  J.D.,  University  of  Chicago,  1963. 

Helen  P.  Garfield,  Professor.  B.S.J. ,  Northwestern  University,  1945;  J. D.,  University  of  Col- 
orado, 1967. 

Harold  Greenberg,  Associate  Professor.  A.B.,  Temple  University,  1959;  J.D.,  University  of 
Pennsylvania,  1962. 

Jeffrey  W.  Grove,  Associate  Dean  for  Academic  Affairs  and  Professor.  A.B.,  Juniata 
College,   1965;  J.D.,  George  Washington  University,   1969. 

William  F.  Harvey,  CarlM.  Gray  Professor  of  Law.  A.B.,  University  of  Missouri,  1954;  J. D., 
Georgetown  University,  1959;  LL.M.,  1961. 

W.  William  Hodes,  Professor.  A.B.,  Harvard  College  1966;  J.D.,  Rutgers  Newark,  1969. 

Lawrence  A.  Jegen,  III.,  Thomas  F.  Sheehan  Professor  of  Tax  Law  and  Policy ,  1982.  A.B., 
Beloit  College,  1956;  J.D.,  The  University  of  Michigan  1959;  M.B.A.,  1960,  LL.M., 
New  York  University,  1963. 

Henry  C.  Karlson,  Professor.  A.B.,  University  of  Illinois,  1965;  J.D.,  1968;  LL.M.,  1977. 

William  Andrew  Kerr,  Professor.  A.B.,  West  Virginia  University,  1955.  J.D.,  1957,  LL.M., 
Harvard  University,  1958;  B.D.,  Duke  University,  1968. 

Eleanor  D.  Kinney,  Assistant  Professor.  A.B.,  Duke  University,  1969;  M.A.,  University 
of  Chicago,   1970;  J.D.,  Duke  University,   1973. 

Walter  W.  Krieger,  Associate  Professor.  A.B.,  Bellarmine  College,  1959;  J.D.,  University 
of  Louisville,  1962;  LL.M.,  George  Washington  University,  1969. 

David  P.  Leonard,  Associate  Professor.  B.A.,  University  of  California  at  San  Diego,  1974; 
J.D.,  UCLA  School  of  Law,  1977. 

Robin  Paul  Malloy,  Assistant  Professor.  B.S.,  Purdue  University,  1971;  J.D.,  University 
of  Florida,   1980;  LL.M.,   University  of  Illinois,   1983. 

William  E.  Marsh,  Professor.  B.S.,   University  of  Nebraska,   1965;  J.D.,   1958. 


SusANAH  M.  Mead,  Associate  Professor.  B.A.,  Smith  College,  1969;  J.D.,  Indiana  University, 

1976. 

Mary  H.  Mitchell,  Associate  Professor.  A.B.,  Butler  University,  1975;  J.D.,  Cornell  Law 
School,  1978. 

David  R.  Papke,  Associate  Professor.  A.B.,  Harvard  College,  1969;  J.D.,  Yale  Law  School, 
1973;  M.A.  in  American  Studies,  Yale  University,  1973;  M.  Phil.,  in  American  Studies, 
The  University  of  Michigan,   1980;  Ph.D.,   1983. 

David  E.  Pierce,  Assistant  Professor  of  Law.  B.A.,  Pittsburgh  State  University,  1974;  J.D., 
Washburn  University,  1977;  LL.M.,  University  of  Utah,  1982. 

Ronald  W,  Polston,  Professor.  B.S.,  Eastern  Illinois  University,  1953;  LL.B.,  University  of 
Illinois,  1958. 

Kenneth  M.  Stroud,  Professor.  A.B.,  Indiana  University,  1958;  J.D.,  1961. 

James  W.  Torke,  Professor.  B.S.,   University  of  Wisconsin,   1963;  J.D.,   1968. 

James  Patrick  White,  Professor  (on  special  assignment).  A.B.,  University  of  Iowa,  1953;  J.D., 
1956;  LL.M.,  George  Washington  University,  1959. 

Law^rence  p.  Wilkins,  Professor.  B.A.,  The  Ohio  State  University,  1968;  J.D.,  Capital  Univer- 
sity Law  School,  1973;  LL.M.,  University  of  Texas  School  of  Law,  1974. 

Mary  Wolf,  Visiting  Assistant  Professor  of  Law,  B.A.,  Saint  Xavier  College,  1969;  J. D.,  Univer- 
sity of  Iowa  College  of  Law,  1974. 

Harold  R.  Woodard,  Professorial  Lecturer.  B.S.,  Harvard  University,  1933;  J.D.,  1936. 


Emeriti 

Agnes  P.  Barrett,  Associate  Professor  Emeritus.  B.S.,  Indiana  University,  1942;  J.D.,  1964. 
Cleon  H.  Foust,  Professor  Emeritus.  A.B.,  Wabash  College,  1928;  J.  D.,  University  of  Arizona, 

1933. 
John  S.  Grimes,  Professor  Jurisprudence  Emeritus.  A.B.,  Indiana  University.  1929;  J. D.,  1931. 
Melvin  C.  Poland,  Cleon  H.  Foust  Professor  of  Law  Emeritus,  B.S.  Kansas  State  University, 

1940;  LL.B.,  Washburn  University,  1949;  LL.M.,  The  University  of  Michigan,  1950. 
R.  Bruce  Townsend,  Cleon  H.  Foust  Professor  of  Law  Emeritus,  A.B.,  Coe  College,  1938; 

J.D.,  University  of  Iowa,  1940. 

Legal  Writing  Instructors 

Jeffrey  Been,  A.B.,    Wabash  College,   1981;  J.D.,  Indiana  University,   1984. 

Michael  Mullett,  Lecturer.  B.A.,  University  of  Michigan,  1966;  M.A.,  1973;  J.D.,  Indiana 

University,  1982. 
Vickie  Renfrov^,  Lecturer.  B.A.,  University  of  Northern  Iowa,  1970;  M.A.,  1971;  Ph.D., 

Indiana  University,  Bloomington,  1976;  J.D.,  Indiana  University,  Bloomington,  1981. 
Joan  Ruhtenberg,  Lecturer.  B.A.,  Mississippi  University  for  Women,  1959;  J.D.,  Indiana 

University,  1980. 

Law  Library  Staff 

Terri  Lea  Hardin,  Affiliate  Librarian,  B.A.,  Indiana  University,  1982;  M.L.S.,  1983. 
Mary  P.  Hudson,  Assistant  Librarian,  B.A.,  Ball  State,  1969;  M.L.S.,  Indiana  Universtiy,  1973. 
Wendell  E.  Johnting,  Technical  Services  Librarian.  A.B.,  Taylor  University,  1974;  M.L.S., 

Indiana  University,  1975. 
Constance  Matts,  Associate  Librarian.   B.A.,   1973,   Case   Western  Reserve  University; 

M.S.L.S.,    1974,    Case    Western    Reserve    University;   M.A.I.R.,    1976,    Creighton 

University. 
KiyoskiOtsv,  Assistant  Librarian,  Parkland  College,  A.  A.,  1976;  A.  B.,  University  of  Illinois, 

1980;  M.S.,  1982;  C.A.S.,  1983. 


Digitized  by  the  Internet  Archive 

in  2011  with  funding  from 

LYRASIS  IVIembers  and  Sloan  Foundation 


http://www.archive.org/details/indianalawreview19486unse 


I 


Indiana  Laiv  Revieiiv 


Volume  19  1986  Number  4 


Foreword 

This  Symposium  marks  the  inauguration  of  the  Program  for  Law, 
Medicine  and  the  Health  Care  Industry  at  the  Indiana  University  School 
of  Law  —  Indianapolis.  The  primary  mission  of  the  program  is  to  con- 
duct scholarly  research  on  health  law  issues  of  concern  to  the  state  of 
Indiana  and  to  the  nation.  The  Program  has  undertaken  research  on  a 
variety  of  legal  issues  affecting  the  health  care  industry  ranging  from 
reform  of  the  administrative  appeals  procedures  for  the  Medicare  pro- 
gram and  medical  malpractice  to  the  thorny  bioethical  issues  emerging 
in  the  treatment  of  individuals  with  AIDS.  The  program  is  also  dedicated 
to  improving  teaching  and  enhancing  the  law  school  curriculum  in  the 
field  of  health  law.  Finally,  the  program  is  committed  to  serving  as  an 
information  and  educational  resource  for  the  health  care  community. 

In  this  Symposium,  entitled  Financing  and  Regulating  Health  Care 
Services:  Hard  Choices  and  Ethical  Dilemmas,  the  Program  joins  the 
Indiana  Law  Review  in  drawing  together  several  disparate  voices  in  a 
discussion  of  the  implications  of  adjusting  the  financing  and  regulation 
of  health  care  services  to  accommodate  diminishing  resources  for  and  in- 
creasing constraints  on  the  health  care  system.  The  Symposium  opens  with 
an  article  by  Randall  R.  Bovbjerg  of  The  Urban  Institute  and  William 
G.  Kopit  of  Epstein  Becker  Borsody  &  Green,  Washington,  D.C.  entitled 
Coverage  and  Care  for  the  Medically  Indigent:  Public  and  Private  Op- 
tions. In  this  comprehensive  examination  of  the  problem  of  "uncompen- 
sated care,"  the  authors  evaluate  alternative  ways  of  organizing  and 
financing  coverage  or  care  for  the  medically  indigent.  The  authors  bring 
to  this  topic  significant  expertise  in  health  policy.  Mr.  Bovbjerg  has  con- 
ducted extensive  research  on  insurance  and  health  policy  issues  and  served 
as  a  practicing  insurance  regulator  and  health  specialist  at  the 
Massachusetts  Insurance  Department.  In  addition  to  representing  a  number 
of  hospitals  and  hospital  associations,  Mr.  Kopit  served  on  the  Task  Force 
on  Indigent  Care  of  the  District  of  Columbia  Hospital  Association  and 
chaired  its  subcommittee  on  financing  indigent  care. 

In  the  second  article,  Carl  T.  Schramm,  former  chairman  of  the 
Maryland  Health  Care  Cost  Review  Authority  and  a  leading  scholar  of 
hospital  rate-setting  issues  for  the  last  decade,  examines  the  political  pro- 
cess underlying  state  efforts  to  reform  hospital  financing  mechanisms.  In 


853 


854  INDIANA  LA  W  REVIEW  [Vol.  19:853 

State  Hospital  Cost  Containment:  An  Analysis  of  Legislative  Initiatives, 
Professor  Schramm  identifies  the  interested  parties  and  describes  the  posi- 
tion each  party  is  Ukely  to  take,  the  dynamics  of  various  legislative  tac- 
tics, and  the  Hkely  outcomes  of  state  rate-setting  initiatives. 

Two  articles  by  Clark  C.  Havighurst  of  the  Duke  University  School 
of  Law  follow.  In  the  first,  Liver  Transplantation  in  Massachusetts:  Public 
Policymaking  as  Morality  Play,  Professor  Havighurst  and  Nancy  M.P. 
King  present  the  story  of  Jamie  Fiske  as  a  case  study  of  how  a  centrally- 
controlled  health  care  system  faces  difficult  choices  concerning  health  care 
and  health  care  technology.  In  the  second,  The  Lithotripsy  Game  in  North 
Carolina:  A  New  Technology  Under  Regulation  and  Deregulation,  Pro- 
fessor Havighurst  and  Robert  S.  McDonough  examine  how  one  state 
handled  the  distribution  of  a  costly  and  highly  sophisticated  new  technology 
in  two  contrary  contexts  —  regulation  and  deregulation. 

Even  though  the  federal  government  no  longer  mandates  health  plan- 
ning and  certificate  of  need,  many  states  have  retained  these  strategies 
to  control  distribution  of  health  care  facilities  and  services.  In  Full  Cir- 
cle: The  Return  of  Certificate  of  Need  Regulation  of  Health  Facilities 
to  State  Control,  James  B.  Simpson,  the  Director  of  the  Legal  Resources 
Program  at  the  Western  Center  for  Health  Planning,  recounts  the  changes 
that  have  evolved  in  the  scope  of  coverage  of  state  certificate  of  need 
programs  from  their  origins  to  the  present. 

In  Reform  Revisited:  A  Review  of  the  Indiana  Medical  Malpractice 
Act  Ten  Years  Later,  James  D.  Kemper,  Myra  C.  Selby,  and  Bonnie  K. 
Simmons  of  Ice  Miller  Donadio  and  Ryan,  Indianapohs,  describe  one 
state's  attempt  to  address  the  medical  malpractice  "crisis"  of  the  1970's. 
These  authors,  leading  health  law  practitioners  in  the  state  of  Indiana, 
consider  in  turn  the  original  purpose  of  the  Indiana  Act,  the  impact  of 
recent  amendments,  the  functioning  of  the  medical  review  panel,  constitu- 
tional challenges  to  the  Act  and  the  impact  of  federal  cost  containment 
measures  on  state  malpractice  law. 

These  articles,  with  their  focus  on  state  law  issues,  emphasize  the 
critical  development  of  health  policy  in  the  1980's:  the  flow  of  financial 
and  programmatic  responsibility  for  government  health  programs  to  the 
states.  This  development  has  resulted  in  increased  state  interest  in  address- 
ing the  pressing  health  pohcy  issues  of  today,  i.e.,  paying  for  care  for 
the  medically  indigent,  controlUng  hospital  costs,  mitigating  the  threat  of 
medical  malpractice  to  access  to  and  cost  of  medical  care,  and  the  ever 
present  pressure  to  impose  rationality  on  the  distribution  of  health  care 
resources  through  planning  and  regulation. 

The  final  three  articles  address  health  policy  issues  arising  at  the  federal 
level.  Throughout  the  1980's,  the  federal  government  has  retained  the 
dominant  role  in  the  public  financing  of  health  care  services  through  the 
Medicare  and  Medicaid  programs  and,  since  1980,  has  adopted  a  radically 
different  system  for  paying  for  hospital  services  under  the  Medicare  pro- 


1986]  FOREWORD  855 

gram  —  the  prospective  payment  system  with  prices  based  on  patient 
diagnosis.  In  Making  Hard  Choices  Under  the  Medicare  Prospective  Pay- 
ment System:  One  Administrative  Model  for  Allocating  Medical  Resources 
Under  a  Government  Health  Insurance  Program,  Eleanor  D.  Kinney, 
Director  of  the  Program  for  Law,  Medicine  and  the  Health  Care  Industry, 
analyzes  the  administrative  model  by  which  the  federal  government  and 
also  hospitals  and  physicians  make  decisions  about  the  allocation  of 
hospital  services  to  Medicare  beneficiaries  under  the  Medicare  prospective 
payment  system.  In  Bowen  v.  American  Hospital  Association:  Federal 
Regulation  Is  Powerless  to  Save  Baby  Doe,  Dennis  Cantrell  of  Bingham 
Summers  Welsh  &  Spilman,  Indianapolis,  explores  the  Reagan  Administra- 
tion's effort,  born  of  a  profound  commitment  to  the  preservation  of  fetal 
hfe,  to  regulate  treatment  of  severely  handicapped  newborns  through 
federal  civil  rights  laws,  and  the  Supreme  Court's  response.  The  Sym- 
posium closes  with  a  student  note  on  how  the  predominant  federal 
economic  policy  of  promoting  competition  in  the  marketplace  through 
the  antitrust  laws  plays  out  with  respect  to  one  aspect  of  the  health  care 
system.  In  Denying  Hospital  Privileges  to  Non-Physicians:  Does  Quality 
of  Care  Justify  a  Potential  Restraint  of  Trade?,  the  author  proposes 
heightened  judicial  scrutiny  of  a  hospital's  claim  that  quality  of  care  con- 
cerns justify  its  denial  of  staff  privileges  to  a  group  of  competitors. 

Our  foreword  to  this  Symposium  would  be  incomplete  without 
acknowledging  the  numerous  people  who  assisted  in  this  endeavor. 
Specifically,  we  would  like  to  thank  the  editorial  board  and  staff  of  the 
Indiana  Law  Review,  particularly  Gayle  Reindl  and  Debra  McVicker.  We 
would  also  hke  to  recognize  the  support  and  encouragement  of  Gerald 
L.  Bepko,  former  Dean  of  the  law  school  and  now  Vice  President  of 
Indiana  University-Purdue  University  at  Indianapolis.  Finally,  we  would 
like  to  thank  Mabel  K.  Hart  of  the  Program  staff  and  law  students 
KimberHe  L.  Forgey,  Barbara  A.  Knotts,  Marilyn  Wilder,  and  Michael 
D.  Wright  for  their  invaluable  assistance  in  the  production  of  this 
Symposium. 

Eleanor  D.  Kinney 
Barbara  McCarthy  Green 


Coverage  and  Care  for  the  Medically  Indigent: 
Public  and  Private  Options 


Randall  R.  Bovbjerg* 
William  G.  Kopit** 


I.     Introduction 


As  of  March  1984,  about  35  million  people  had  no  health  insurance 
coverage,  public  or  private,  although  some  of  them  were  only  temporarily 
uncovered.  Up  to  40-odd  miUion  more,  often  called  the  "underinsured," 
had  incomplete  coverage.^  These  people,  with  little  or  no  insurance,  need 
periodic  medical  attention  as  much  as  or  more  than  the  well  insured, 
but  face  far  more  trouble  getting  it.^  Often,  they  have  been  forced  to 
rely  on  the  charity  of  providers,  particularly  hospitals. 

From  a  hospital's  viewpoint,  the  issue  is  how  much  "uncompensated 
care"  to  give.  As  every  newspaper  reader  or  "Sixty  Minutes"  viewer 
knows,  hospitals  in  today's  more  competitive  environment  have  more 
limited  ability  to  care  for  the  needy  with  public  funds  or  from  margins 
earned  caring  for  the  better-off.^  From  the  patient's  perspective,  the 
problem  is  access  to  care.  One  hears  of  patients  being  shuttled  from 
hospital  to  hospital  in  search  of  care,  even  when  the  need  seems  urgent,"^ 

♦Senior  Research  Associate,  Health  Pohcy  Center,  The  Urban  Institute,  Washington, 
D.C.;  Research  Fellow  (off -site).  Program  for  Law,  Medicine,  and  the  Health  Care  Industry, 
Indiana  University  School  of  Law— Indianapolis.  A.B.,  University  of  Chicago,  1968;  J.D., 
Harvard  Law  School,  1971. 

♦♦Partner,  Epstein  Becker  Borsody  &  Green,  P.C.  A.B.,  Bucknell  University,  1961; 
J.D.,  Columbia  University,  1964. 


The  authors  gratefully  acknowledge  the  assistance  of  Joyce  Cowan,  Associate  with 
the  firm  of  Epstein  Becker  Borsody  &  Green,  P.C,  in  preparing  this  Article. 


'On  the  numbers  of  uninsured  and  underinsured,  see  infra  text  accompanying  notes 
11-29. 

^See  infra  text  accompanying  notes  27-29. 

^According  to  data  from  the  American  Hospital  Association,  for  the  year  ending  June 
1986,  hospitals'  net  patient  margin  was  only  0.8%;  total  net  margin  (including  non-patient 
revenues)  was  5.4%,  down  from  2.0%  and  6.3%  the  previous  year.  Hosp.  Research  &  Educ. 
Trust,  Selected  Hospital  Performance  Indicators:  June  1985  &  1986,  Econ.  Trends,  Fall 
1986,  at  5. 

*See,  e.g.,  Cahan  &  Pave,  When  the  Patient  Can't  Pay  the  Medical  Bill,  Bus.  Wk., 
Feb.  18,  1985,  at  59;  Taylor,  Ailing,  Uninsured  and  Turned  Away,  Washington  Post, 
June  30,  1985,  at  Al,  col.  3. 

857 


858  INDIANA  LA  W  REVIEW  [Vol.  19:857 

and  of  hospitals  * 'dumping"  impecunious  patients  on  the  nearest  public 
hospital  legally  obligated  to  take  them.^  The  problems  that  poor  patients 
have  in  receiving  more  routine  care  from  physicians,  hospital  outpatient 
departments,  or  other  providers  are  far  less  dramatic  or  well  documented. 

The  intertwined  problems  of  the  uninsured  population  and  of  un- 
compensated care  have  grown  rapidly  in  the  recent  past  and  are  likely 
to  continue  to  grow  in  the  near  future.  Private  insurance,  public  pro- 
grams, and  hospital  margins  are  all  in  a  "cutback*'  era,  and  unfortu- 
nately, the  uninsured  are  on  the  cutting  edge.^ 

Under  our  legal  system,  states  and  localities  bear  the  ultimate  re- 
sponsibility for  fashioning  whatever  responses  are  made.  Indeed,  the 
uninsured/uncompensated  care  problem  was  high  on  the  agenda  of  most 
state  legislatures  during  the  1986  sessions  and  will  probably  remain  so 
for  1987.^  BilHons  of  dollars  in  new  assistance  seem  needed.  The  current 
federal  administration  is  unlikely  to  offer  new  assistance  for  these  efforts.^ 
Thus,  it  seems  Hkely  that  the  usual  American  genius  for  weaving  together 
various  strands  of  partial  solutions  through  varied  mechanisms  will  have 
to  come  into  play.  This  Article  suggests  what  such  mechanisms  may  be. 

II.     The  Nature  and  Extent  of  Problems 

A.     The  Medically  Indigent  and  the  Uninsured 

The  problem  of  providing  health  care  for  those  who  cannot  or  do 
not  provide  for  themselves  can  be  seen  from  a  number  of  perspectives. 
In  fact,  there  is  no  consensus  on  what  "the"  problem  is.  Localities 
around  the  country  differ  tremendously  in  their  populations'  medical 
needs  and  in  their  patterns  of  medical  financing  and  delivery,  and  there 
is  probably  even  more  diversity  in  practical  and  philosophical  approaches 
to  proposed  solutions  in  each  area.  Some  people  are  concerned  only 
about  providing  emergency  care  for  the  very  poor  and  uninsured;  others 
worry  that  even  many  insured  people  are  not  well  covered  and  hence 
cannot  pay,  in  full,  providers  who  treat  them. 

Nevertheless,  it  seems  clear  that  insufficient  financing  adversely  af- 
fects access  to  care  and,  thus,  the  health  of  the  medically  indigent.  By 


^See,  e.g.,  Schiff,  Ansell,  Schlosser,  Idris,  Morrison  &  Whitman,  Transfers  to  a 
Public  Hospital,  314  New  Eng.  J.  Med.  552  (1986);  Wrenn,  No  Insurance,  No  Admission, 
312  New  Eng.  J.  Med.  373  (1985);  The  'Dumping'  Problem:  No  Insurance,  No  Admission 
(letters)  312  New  Eng.  J.  Med.  1522  (1985);  Knox,  Some  Local  Hospitals  'Dump'  The 
Uninsured,  Boston  Globe,  Feb.  6,  1984,  at  31,  col.  2. 

^See  infra  text  accompanying  notes  46-64. 

''See,  e.g..  Intergovernmental  Health  Policy  Project,  George  Washington 
Univ.,  Major  Changes  in  State  Medicaid  and  Indigent  Care  Programs  (July  1986). 

^See  infra  note  63. 


1 


1986]  CARE  FOR  MEDICALLY  INDIGENT  859 

''medically  indigent,"  this  Article  means  the  class  of  people  who  cannot 
afford  necessary  medical  care  from  their  own  resources  or  from  health 
insurance  coverage,  if  any.^  It  should  be  noted  that  the  Article  follows 
general  usage  by  recognizing  that  even  middle  class  people  can  become 
"medically"  indigent  when  their  net  medical  bills,  after  insurance,  are 
very  high  relative  to  their  income  and  assets.  Of  course,  the  likelihood 
of  medical  indigency  is  far  less  for  such  people  than  it  is  for  those  who 
begin  with  low  incomes  and  little  or  no  insurance  coverage. 

B.     The  Uninsured:  Number  and  Characteristics 

People  without  public  or  private  health  insurance  are  the  core  of 
the  medical  indigency  problem.'^  People  who  have  coverage,  but  coverage 
that  does  not  fully  protect  against  catastrophic  losses — and  hence  against 
medical  indigency — are  a  lesser  problem.^' 

How  many  people  are  uninsured  and  face  problems  of  medical  access? 
Who  are  they  and  why  do  they  lack  resources?  How  much  care  do  they 
get  now?  What  is  the  extent  of  the  financial  shortfall?  All  of  these 
pertinent  questions  can  be  answered  only  imperfectly  from  available 
evidence. 

To  understand  who  lacks  coverage,  one  must  appreciate  how  most 


'None  of  the  three  elements — necessary  care,  poverty,  and  lack  of  (adequate)  in- 
surance— readily  allows  of  a  clear-cut,  operational  definition.  Opinions  vary  greatly  on 
how  much  medical  care  is  truly  needed,  on  how  poor  one  must  be  to  be  truly  needy, 
and  on  what  constitutes  inadequacy  in  insurance.  Moreover,  deciding  on  medical  indigency 
in  advance  of  a  known  level  of  medical  need  (or  spending)  is  even  more  difficult. 

'""Insurance"  as  used  here  means  any  financing  method  available  to  a  patient  other 
than  out-of-pocket  payment  or  charity.  Public  coverage  includes  Medicare,  Medicaid,  and 
other  medical  assistance  plans.  Private  coverage  need  not  be  "insurance"  under  the  state 
insurance  code.  It  may  be  conventional  coverage  from  a  commercial  life  and  health 
insurance  company,  such  as  Prudential,  or  from  a  not-for-profit  Blue  Cross/Blue  Shield 
plan;  or  it  may  be  one  of  many  alternative  styles  of  coverage  from  a  health  maintenance 
organization  (HMO),  a  preferred  provider  organization  (PPO),  or  some  other  financing 
and  delivery  entity.  Finally,  it  may  resemble  any  of  the  above  but  be  managed  on  a  self- 
insured  basis  by  an  employment  group  that  "insures"  its  own  risk  rather  than  placing  it 
with  a  separate  insurer. 

"Such  people  generally  have  coverage  for  routine  hospital  stays  and  some  physician 
and  other  services  as  well,  but  not  for  very  large  medical  expenses.  At  some  point,  their 
uncovered  bills  become  sizable  compared  with  their  income  (especially  if  they  cannot  work), 
and  they  become  medically  indigent.  The  best  estimate  of  the  extent  of  such  problems 
comes  from  1977  national  survey  data  indicating  that  13%  of  the  population  under  65 
was  uninsured.  Depending  on  the  definitions  applied,  an  additional  10  to  24%  of  the 
under-65  population  is  w/zotennsured.  The  smaller  figure  consists  of  those  who  have  at 
least  a  5%  expectation  of  out-of-pocket  expenses  exceeding  10%  of  annual  family  income; 
the  larger  figure  includes  all  those  whose  insurance  does  not  limit  out-of-pocket  hospital 
expenses.  Farley,  Who  Are  the  Underinsured? ,  63  Milbank  Mem.  Fund  Q.  476  (1985); 
see  also  M.  Sulvetta  &  K.  Swartz,  The  Uninsured  and  Uncompensated  Care  3,  19 
(1986)  (Tables  1  and  4). 


860  INDIANA  LAW  REVIEW  [Vol.  19:857 

Americans  are  covered.  After  World  War  II,  private  health  insurance 
grew  by  leaps  and  bounds.  Provided  largely  as  a  fringe  benefit  of 
employment,  private  coverage  was  greatly  encouraged  by  its  exclusion 
from  income  taxation  and  its  inclusion  as  a  subject  of  collective  bar- 
gaining.^^ In  1965,  pubUc  coverage  took  a  quantum  leap  with  the  congres- 
sional enactment  of  Medicare,  largely  for  the  aged,  and  Medicaid,  for 
the  "deserving"  poor,  as  defined  by  participating  states. ^^  Coverage 
continued  to  expand  through  the  1970*s,  not  only  in  terms  of  the  number 
of  peojple  covered  but  also  in  the  breadth  and  depth  of  the  benefits 
provided; ^^  as  a  result,  the  number  of  uninsured  people  decHned.^^ 

In  contrast,  the  early  1980's  saw  a  rise  in  the  number  of  people 
without  coverage,*^  for  reasons  considered  below.  As  of  early  1984,  about 
35  million  people  under  age  sixty-five,  or  about  seventeen  percent  of 
them,  reported  that  they  lacked  health  coverage  at  the  time  surveyed. 
Most  of  them  were  probably  uninsured  for  the  full  year,  some  for  only 
part  of  the  year.*^ 

Table  1  shows  the  growth  in  the  uninsured  population  between  1977 
and  1984. 


'^In  1945,  only  32  million  people  were  privately  covered  for  hospital  inpatient  care; 
by  1965,  139  million  were.  Health  Ins.  Ass'n.  of  America,  Source  Book  of  Health 
Ins.  Data,  1986  Update,  Table  1.1,  at  3.  The  average  marginal  "tax  subsidy"  for  U.S. 
workers  has  been  estimated  to  exceed  3597o  of  premiums,  C.  Phelps,  Taxing  Health 
Insurance:  How  Much  Is  Enough?  (The  Rand  Corporation,  Report  P-6915,  1983),  or 
about  10*^0  of  total  private  health  insurance  spending,  Congressional  Budget  Office, 
Containing  Medical  Care  Costs  Through  Market  Forces  (May  1982).  See  generally 
Pauly,  Taxation,  Health  Insurance  and  Market  Failure,  24  J.  Econ.  Lit.  629  (1986). 

'^Social  Security  Act,  tit.  XVIII  &  XIX,  42  U.S.C  §§  1395,  1396  et.  seq.  (1982  & 
Supp.   1985). 

'"See  Health  Ins.  Ass'n  of  America,  supra  note  12. 

'^K.  SwARTZ,  Who  Has  Been  Without  Health  Insurance?  Changes  Betw^een 
1963  AND  1979  (Urban  Institute,   1984). 

'*M.  SuLVETTA  &  K.  SwARTZ,  supra  note  11,  at  1,  3;  see  also  Health  Ins.  Ass'n. 
OF  America,  supra  note  12. 

'■'M.  SuLVETTA  &  K.  SwARTZ,  supra  note  11,  at  3;  see  also  K.  Swartz,  Interpreting 
THE  Estimates  from  Four  National  Surveys  of  the  Number  of  People  Without  Health 
Insurance:  A  Project  Summary  Report  (Urban  Institute,  1985).  Surveys  done  in  1977 
and  1980  compared  those  without  coverage  for  the  full  year  with  those  uncovered  only 
part  of  the  year.  About  three-quarters  of  those  uninsured  at  a  single  point  in  time  were 
uninsured  all  year;  about  9%  of  13%,  for  the  1977  survey.  An  additional  4%  were 
uninsured  part  of  the  year.  See  M.  Sulvetta  &  K.  Sw^artz,  supra  note  11,  at  3;  Friedman, 
Health  Insurance  and  Cross-Subsidization,  Hospitals,  Oct.  16,  1985,  at  126.  (interview 
with  Jack  Hadley  and  Katherine  Swartz).  Most  estimates  of  the  uninsured  exclude  people 
aged  65  and  older  because  virtually  all  of  them  are  now  covered  by  Medicare,  after  the 
expansions  of  recent  years  to  include  federal  workers  and  others. 


Millions 

of 

Percentage  of 

Uninsured 

Population 

26.2 

13.8<^o 

26.0 

13.7 

28.6 

14.6 

30.7 

15.2 

32.7 

16.1 

35.1 

17.1 

1986]  CARE  FOR  MEDICALLY  INDIGENT  861 

Table  1 

Increases  in  the  Uninsured  over  Time 

(selected  survey  estimates,  under  age  65) 


Year 

1977 

1978 

1980 

1982 

1983 

1984 

(adapted  from  M.  Sulvetta  &  K.  Swartz,  supra  note  11,  Table  1). 


Why  have  the  numbers  of  uninsured  people  climbed?  One  reason 
is  Medicaid  cutbacks  in  eligibility,  encouraged  by  recession-induced  short- 
falls in  expected  state  revenues  and  required  or  encouraged  by  federal 
welfare  and  Medicaid  changes  in  1981.'^  Medicaid  now  covers  only  about 
forty  percent  of  people  below  the  poverty  line.'^ 

The  recession  of  the  early  1980's  also  put  many  people  at  least 
temporarily  out  of  work  and  hence  out  of  private  health  coverage  as 
well. 2^  Unemployment  was  especially  high  in  heavy  industry,  hit  by  both 
recession  and  intensifying  foreign  competition.  Jobs  lost  in  this  sector, 
traditionally  the  best  insured  area  of  the  economy,  often  were  not 
regained,  and  replacement  jobs  in  service  and  other  industries  were  far 
less  likely  to  offer  employer-paid  health  insurance.^' 


'*See  generally  R.  Bovbjerg  &  J.  Holahan,  Medicaid  in  the  Reagan  Era:  Federal 
Policy  and  State  Choices  (1982);  J.  Holahan  &  J.  Cohen,  Medicaid:  The  Trade-off 
Between  Cost  Containment  and  Access  to  Care  (1986).  Medicare  eligibility  cutbacks, 
in  contrast,  have  been  minimal,  largely  achieved  through  administrative  revisions  in  disabiUty 
standards. 

"J,  Holahan  &  J.  Cohen,  supra  note  18.  Medicaid  covers  about  one-third  of  poor 
adults,  one-half  of  poor  children.  Id.  at  47.  However,  for  various  reasons,  about  one- 
third  of  Medicaid  recipients  have  incomes  above  poverty  levels.  Conversely,  the  main 
reason  so  many  poor  people  are  not  covered  under  Medicaid  is  the  program's  categorical 
nature;  only  certain  categories  of  poor  people  can  qualify.  Notably,  childless  people  and 
intact  families  are  generally  ineligible.  But  see  infra  notes  237,  239.  Cutbacks  among  even 
eligible  groups  are  also  responsible.  See  J.  Holahan  &  J.  Cohen,  supra  note  18. 

^^See,  e.g..  Health  Insurance  for  the  Unemployed:  Hearing  Before  the  Subcomm. 
on  Health  of  the  Senate  Comm.  on  Finance,  98th  Cong.,  1st  Sess.  (1983);  Staff  of 
Subcomm.  on  Health  and  the  Environment  of  the  House  Comm,  on  Energy  and 
Commerce,  98th  Cong.,  1st  Sess.,  Report  on  Health  Benefits:  Loss  Due  to  Unem- 
ployment (Comm.  Print  1983). 

^^See,  e.g.,  K.  Sw^artz,  The  Changing  Face  of  the  Uninsured  (Urban  Institute, 
May  1984);  Friedman,  The  Right  Issue  at  the  Wrong  Time,  CHA  Insight,  June  9,  1986, 
at  1;  Friedman,  supra  note  17,  at  126-27;  see  also  infra  note  45. 


862  INDIANA  LAW  REVIEW  [Vol.  19:857 

Moreover,  even  those  who  retained  coverage  at  work  in  the  1980's 
often  have  found  their  coverage  cut  back.  Cutbacks  have  taken  the  form 
of  increased  requirements  for  patient  cost  sharing,  utiUzation  review, 
and  the  Hke,^^  as  well  as  decreased  employer  payment  of  insurance 
premiums,  especially  for  dependents. ^^ 

What  explains  the  lack  of  insurance  among  non-poor  working  adults? 
Obviously,  their  employers  have  not  bought  them  insurance.  Type  of 
employment  also  matters,  especially  size  of  employment  group,  because 
insurance  is  much  cheaper  for  large  groups  than  for  small  ones  or  for 
individuals.^"*  Beyond  workplace  characteristics  comes  individual  willing- 
ness to  pay  for  coverage;  presumably  nonbuyers  either  cannot  afford 
coverage  that  is  attractive  to  them  or  they  do  not  appreciate  its  value. 

One  of  the  most  discouraging  findings  of  recent  surveys  is  that 
households  that  contain  at  least  one  insured  adult  also  contain  many 
uninsured  dependents.  In  fact,  one  third  of  all  uncovered  children — over 
3  million  children — came  from  such  households. ^^  Although  direct  caus- 
ation is  not  established,  presumably  this  lack  of  coverage  reflects  the 
worker's  choice  not  to  pay  the  additional  amount  necessary  to  obtain 
family  cover  age.  ^^ 


^^See,  e.g.,  J.  Calif ano,  America's  Health  Care  Revolution:  Who  Lives?  Who 
Dies?  Who  Pays?  (1986);  P.  Fox,  W.  Goldbeck  &  J.  Spies,  Health  Care  Cost  Man- 
agement: Private  Sector  Initiatives  (1984). 

"5ee,  e.g..  Bureau  of  Labor  Statistics,  U.S.  Dep't  of  Labor,  Employee  Benefits 
in  Medium  and  Large  Firms,  1985  (1986).  Having  to  pay  for  dependents  out  of  pocket, 
with  after-tax  dollars,  is  a  major  disincentive  to  buying  coverage,  especially  when  that 
coverage  features  increasingly  higher  deductibles  and  coinsurance. 

^On  economies  of  larger-scale  insurance,  see,  e.g.,  Bovbjerg,  Insuring  the  Uninsured 
Through  Private  Action:  Ideas  and  Initiatives,  23  Inquiry  403  (1986).  On  large  versus 
small  employers,  see,  e.g.,  Moyer  &  Cahill,  HHS  Survey  Illustrates  Difference  in  Large, 
Small  Employers'  Health  Plans,  Bus.  &  Health,  Nov.  1984,  at  50.  Unfortunately  for 
insurance  coverage,  some  two-thirds  of  new  jobs  are  created  in  small  firms,  mainly  in 
the  service  industry.  See,  e.g..  In  Praise  of  Pizza  Parlours,  The  Economist,  May  17, 
1986,  at  75.  See  generally  Monheit,  Hagen,  Berk  &  Farley,  The  Employed  Uninsured  and 
the  Role  of  Public  Policy,  22  Inquiry  348  (1985)  (characteristics  of  employment  that 
affect  coverage). 

"Friedman,  supra  note  17,  at  128. 

2^Two  other  possible  reasons  for  a  decline  in  insurance  coverage  deserve  brief  mention. 
For  various  reasons,  the  proportion  of  households  headed  by  women  has  risen,  and  these 
households  are  less  likely  than  male-headed  ones  to  have  coverage,  especially  given  Medicaid 
acts.  See  id.  at  128.  Moreover,  to  an  unknown  extent,  more  individuals  have  probably 
become  "uninsurable"  in  the  private  market,  especially  outside  of  large  employment  group 
plans.  Such  people  include  those  with  chronic  conditions  needing  care  or  adverse  medical 
histories  that  put  them  at  high  risk  of  significant  expense;  they  cannot  get  ordinary  coverage 
without  major  exclusions.  See,  e.g.,  Gottschalk,  People  with  Chronic  Diseases  Often  Find 
Insurance  Is  Unaffordable—or  Unavailable,  Wall  St.  J.,  Aug.  12,  1986,  at  29,  col.  3. 
This  phenomenon  is  an  unfortunate  side  effect  of  progress;  medical  treatment  now  saves 
many  who  formerly  would  have  died  (e.g.,  through  better  emergency  care  or  cardiac 
resuscitation)  but  who  now  survive  with  an  adverse  health  history.  Additionally,  medical 


1986] 


CARE  FOR  MEDICALLY  INDIGENT 


863 


Who  are  the  uninsured?  They  fit  no  simple  stereotype.  Common 
expectations  are  that  the  uninsured  are  exclusively  poor,  unemployed, 
young,  and  nonwhite.  Persons  with  any  of  those  characteristics  are  indeed 
at  higher  risk  of  being  uninsured,  as  Table  2  shows. 


Table  2 

Some  Characteristics  That  Put  People  at  High  Risk 

OF  Being  Uninsured  (1984) 


Group 

Percentage  Not  Insured 

Relative  Risk 

Entire  under-65 

Population 

15.2<yo 

1.00 

Unemployed  Adults 

33.6<7o 

2.21 

Income  Below  Poverty 

Line 

33.8% 

2.22 

Age  18-24 

29.0<^o 

1.91 

Children  Age  0-18 

Below  Poverty  Line 

34.1% 

2.24 

Blacks  Age  18-64 

25.0% 

1.64 

Never  Married  Males 

30.6% 

2.01 

Married  Female, 

Spouse  Absent 

36.0% 

2.37 

Children  in  Single-Parent 

Household 

34.2% 

2.25 

Adults  with  No  High 

School  Diploma 

25.5% 

1.68 

(computed  from  M.  Sulvetta  &  K.  Swartz,  supra  note  11,  passim). 


But,  in  fact,  most  of  the  uninsured  have  family  incomes  at  least  somewhat 
above  the  poverty  line,  are  employed,  are  adults,  and  are  white,  as  Table 
3  shows.  These  people  may  thus  seem  less  appeahng  for  consideration 
as  medical  indigents;  still,  medical  bills  of  a  substantial  size  would  clearly 
throw  most  of  these  people  into  the  medically  indigent  category. 


diagnosis  has  improved  physicians'  ability  to  predict  future  problems  and  hence  insurance 
expenses;  the  most  glaring  example  is  screening  for  antibodies  to  the  acquired  immune 
deficiency  syndrome  (AIDS)  virus. 


864 


INDIANA  LA  W  REVIEW 


[Vol.  19:857 


Table  3 

The  Share  of  the  Uninsured  Contributed  by  Groups 

WITH  Certain  Characteristics  (1984) 


Characteristic 


Percentages*  of  Under-65  Uninsured  Who  Are 


Family    Income 

Below  Poverty 

35.6% 

(All  Ages) 

1  to  2x  Poverty  - 

29.3% 

2  to  3x  Poverty  - 

15.4% 

Over  3x  Poverty  - 

19.7% 

Employment  Status 

Employed 

-  56.5% 

(Adults,  18-64) 

Housekeeping 

-  15.2% 

School 

-     7.2% 

Unemployed 

-  12.1% 

Unable  to  work, 

early  retirement 

-     8.9% 

Age 

0-17     -  33.0% 

18-24  -  23.6% 

25-44  -  27.4% 

45-64  -  16.0% 

Race  (Adults) 

White  -  79.3% 
Black  -  17.3% 
Other  -    3.5% 

♦Percentages  in  each  group  may  not  add  to  100.0%  because  of  rounding, 
(adapted  from  M.  Sulvetta  &  K.  Swartz,  supra  note  11,  passim). 


C.     Problems  Posed  by  Lack  of  Coverage 

1.  Poor  Access  to  Care  and  Poor  Health  for  the  Uninsured. — 
Uninsured  people  get  less  medical  care,  for  a  combination  of  reasons: 
they  seek  less  care  on  their  own,  they  are  referred  less  often  for  specialized 
care  or  hospitalization,  or  they  are  turned  away  or  otherwise  discouraged 
by  some  providers.^''  The  uninsured  are  far  more  likely  not  to  have  a 
regular  source  of  care  and  much  less  likely  to  use  medical  services  than 
are  the  insured,  as  Table  4  indicates. 


^^See  Aday  &  Andersen,  The  National  Profile  of  Access  to  Medical  Care:  Where 
Do  We  Stand?,  74  Am.  J.  Pub.  Health  1331  (1984);  see  also  Davis  &  Rowland,  Uninsured 
and  Underserved:  Inequities  in  Health  Care  in  the  United  States,  61  Milbank  Mem.  Fund 
Q.  149  (1983);  Robert  Wood  Johnson  Foundation,  Updated  Report  on  Access  to 
Health  Care  for  the  American  People  (Special  report  no.  1,  1983).  For  a  more  rousing 
portrait  of  the  uninsureds'  problems,  see  Dallek,  Six  Myths  of  American  Medical  Care: 
What  the  Poor  Really  Get,  Health/PAC  Bull.,  May-June  1985,  at  9. 


90.0 

47.0 

4.8% 

15.0% 

17.1% 

32.9% 

9.7% 

23.1% 

1986]  CARE  FOR  MEDICALLY  INDIGENT  865 

Table  4 
How  Insurance  Status  Affects  Medical  Care 

Indicator  of  Medical  Use  Insured         Uninsured 

Physician   visits   per   person   under   age   65   in    1977       3.7  2.4 

Hospital  patient  days  per  100  persons  under  age  65  in 

1977 

Families  who  needed  care  but  did  not  receive  it  in  1982 
Families  who  did  not  see  a  physician  in  1982 
People  with  no  regular  source  of  health  care  in  1982 

(adapted  from  M.  Sulvetta  &  K.  Swartz,  supra  note  11,  at  4  (citing  Davis  & 
Rowland,  supra  note  27;  Robert  Wood  Johnson  Foundation,  supra  note  27)). 

It  is  undocumented  to  what  extent  reduced  access  to  care  hurts  the 
health  of  the  uninsured,  but  it  is  reasonable  to  assume  that  their  health 
does  suffer. ^^  Thus,  the  uninsured  are  generally  thought  to  be  sicker 
than  the  insured,  a  difference  probably  reflecting  not  only  reduced  medical 
attention  as  such  but  also  low  income,  inability  to  work,  depression 
from  unemployment,  and  possibly  other  factors  as  well.^^ 

2.  Uncompensated  Care  for  Providers. — Much  of  the  recent  concern 
over  lack  of  health  coverage  derives  from  hospitals'  fears  of  **uncom- 
pensated  care,"  which  is  a  frequent  result  of  treating  uninsured  persons. ^° 
Uncompensated  care  consists  of  both  charity  care  (provided  to  the 
indigent  with  no  expectation  of  payment)  and  "bad  debts"  (unpaid  bills 
of  those  expected  to  pay).^'  In  1982,  about  five  or  six  percent  of  total 
hospital  charges  went  uncompensated.^^  Because  aggregate  hospital  charges 


^See  generally  Mundinger,  Health  Service  Funding  Cuts  and  the  Declining  Health 
of  the  Poor,  313  New  Eng.  J.  Med.  44  (1985). 

^'Empirical  evidence  on  this  point  is  weak.  Cf.  id.  (loss  of  access  to  medical  care 
hurts  health);  Davis  &  Rowland,  supra  note  27,  at  165-66  (15%  of  uninsured  rate  health 
as  fair  or  poor,  vs.  11%  of  insured;  sick  uninsured  have  4.1  physician  visits  annually, 
vs.  6.9  for  sick  insured). 

^°See  generally  Uncompensated  Hospital  Care:  Rights  and  Responsibilities  (F. 
Sloan,  J.  Blumstein  &  J.  Perrin  eds.  1986)  [hereinafter  Uncompensated  Hospital  Care]. 

^'It  does  not  include  "contractual  allowances"  or  "discounts"  below  charges  or  costs 
that  some  hospitals  give  to  some  insurers'  patients  by  virtue  of  participation  agreements 
(as  for  Blue  Cross/Blue  Shield  plans  in  many  areas)  or  special  negotiations  (as  for  "preferred 
provider"  arrangements  under  which  hospitals  trade  a  discount  for  more  insured  patients). 
Sloan,  Valvona  &  Mullner,  Identifying  the  Issues:  A  Statistical  Profile,  in  Uncompensated 
Hospital  Care,  supra  note  30,  at  16. 

"M.  Sulvetta  &  K.  Swartz,  supra  note  11  at  25;  Sloan,  Valvona  &  Mullner,  supra 
note  31,  at  16,  19.  The  latter  put  1982  uncompensated  hospital  care  at  $6.2  billion,  or 
5  percent  of  charges,  and  6  percent  of  total  receipts;  using  different  survey  data,  the 
former  put  the  1982  level  at  $7.5  billion. 


866  INDIANA  LAW  RE  VIEW  [Vol.  19:857 

exceed  costs  or  revenues,  the  percentage  of  uncompensated  care  is  about 
a  percentage  point  lower  when  expressed  as  a  fraction  of  hospital  budgets. ^^ 

The  burden  of  uncompensated  care  is  not  spread  evenly  across 
providers.  PubHc  hospitals  provide  a  vastly  disproportionate  amount  of 
uncompensated  care  (40.1^o  of  uncompensated  charges,  double  their 
19.0<^o  share  of  total  charges),  as  do  major  teaching  hospitals  (35.8% 
of  uncompensated  charges  vs.  24.09/o  of  total  charges),  and  large  city 
hospitals  generally  (49.1%  of  uncompensated  charges  vs.  39.1%  of  all 
charges). ^"^  Whether  for-profit  hospitals  contribute  their  "fair  share" 
relative  to  similar  not-for-profit  community  hospitals  is  hotly  debated. ^^ 

It  is  not  reliably  known  what  share  of  uncompensated  hospital  care 
goes  to  indigents.  Charity  is  said  to  constitute  about  one  third  of 
uncompensated  care,^^  but  there  is  no  single  accepted  operational  def- 
inition of  "charity  care."  Existing  accounting  practices  allow  hospitals 
discretion  in  applying  classification  standards  for  charity  care,  and  re- 
ported charity  varies  by  hospital. ^^  Thus,  there  is  no  guarantee  that 
reported  hospital  "charity"  accords  with  social  expectations  or  public 
desires  with  regard  to  the  medically  indigent. ^^ 

How  is  "uncompensated  care"  financed?  After  all,  institutions  like 
hospitals  cannot  give  charity  without  themselves  incurring  costs.  Indi- 
vidual professionals  can  donate  "free"  personal  attention,  time,  and 
skill  beyond  normal  working  hours.  But  hospital  care  involves  ancillary 
services,  supplies,  or  multiple  personnel  which  must  be  paid  for  with 
revenue  from  some  source. 

The  conventional  wisdom  is  that  hospitals  cross-subsidize  nonpaying 


"See  supra  note  32.  According  to  data  collected  by  the  American  Hospital  Associa- 
tion, this  amount  increases  to  5.6%  by  1984.  See  infra  note  61. 

^''M.  SuLVETTA  &  K.  SwARTZ,  supro  tiott  11,  at  28,  31,  30. 

''See  generally  For-Profit  Enterprise  in  Health  Care  97-126,  209-23,  225-32  (B. 
Gray  ed.  1986)  [hereinafter  For-Profit-Enterprise]  (asserts  that  for-profit  hospitals  do 
not  contribute  enough).  But  see  Sloan  &  Becker,  For-Profits  v.  Non-Profits:  A  Phantom 
Issue,  Tech.  Rev.,  April  1984,  at  11. 

'^See,  e.g.,  Cohodes,  America:  The  Home  of  the  Free,  the  Land  of  the  Uninsured, 
23  Inquiry  227,  228  (1986)  (charity  care  comprises  one-third  of  uncompensated  care);  see 
also  Sloan,  Valvona  &  MuUner,  supra  note  31,  at  19  (of  1982's  $6.2  biUion  in  uncompensated 
charges,  hospitals  designated  $1.7  billion  as  charity,  $4.5  bilHon  as  bad  debt). 

"For-Profit  Enterprise,  supra  note  35,  at  102;  Sloan,  Valvona  &  Mullner,  supra 
note  31,  at  19.  More  defined  descriptions  do  exist  for  Hill-Burton  purposes.  See  infra 
notes  121-31. 

^*In  fairness  to  hospitals,  it  must  be  noted  that  there  is  little  consistency  in  public 
programs'  definition  of  indigency  for  purposes  of  eligibility  determinations.  One  of  few 
existing  uniform  standards  is  that  established  by  the  federal  Department  of  Health  and 
Human  Services — belatedly,  under  pressure  of  repeated  litigation — to  measure  hospitals' 
adherence  to  Hill-Burton  requirements  to  deliver  "free"  care  to  indigents.  See  For-Profit 
Enterprise,  supra  note  35,  at  102.  See  also  infra  notes  121-28  and  accompanying  text. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  867 

patients  largely  with  revenues  earned  from  paying  patients,  especially 
those  who  pay  hospital  charges  (or  whose  insurers  do),  since  charges 
are  higher  than  costs. ^^  Lesser  sources  of  revenue  include  philanthropic 
contributions,  nonpatient  revenues — both  relatively  minor  for  most  hos- 
pitals— and,  mainly  for  public  institutions,  direct  public  subsidies  from 
tax  funds/*^ 

Alternatively,  a  hospital  can  subsidize  uncompensated  care  from  its 
own  capital,  incurring  a  deficit  met  largely  by  not  funding  depreciation. 
This  last  option  obviously  hurts  the  long-run  viabihty  of  an  institution 
and  may  impair  its  ability  to  raise  operating  capital  as  well.  In  1980, 
fully  one-third  of  the  hospitals  that  provided  a  high  volume  of  care  to 
poor  people  were  fiscally  "stressed"  in  that  they  had  deficits  in  operating 
and  total  accounts. "^^ 

Little  is  known  about  what  care  the  uninsured  indigent  receive  outside 
of  hospitals,  although  it  seems  likely  that  non-hospital  providers  render 
relatively  less  uncompensated  care  than  do  hospitals. ^^  For  society  at 
large,  hospital  service  comprises  some  forty-six  percent  of  personal  health 
care  spending  (exclusive  of  public  health  activities,  medical  research,  and 
construction);  the  balance  goes  to  physicians,  other  professionals,  drugs, 
nursing  homes,  and  so  on."^^  Hospitals,  especially  pubhc  ones,  are  the 
traditional  "providers  of  last  resort,"  and  their  legal  obligations  to 
provide  care  are  greater  than  those  of  other  providers.'^'*  Moreover, 
hospital  care  is  the  most  heavily  insured,  which  traditionally  has  given 
hospitals  more  "third-party"  revenues  from  which  to  cross-subsidize 
charity  care. 


^^5ee,  e.g.,  For-Profit  Enterprise,  supra  note  35,  at  106-07;  Phelps,  Cross-Subsidies 
and  Charge  Shifting  in  American  Hospitals,  in  Uncompensated  Hospital  Care,  supra 
note  30,  at  108.  It  is  often  argued  that  cost-paying  "insurers,"  especially  Medicare  and 
Medicaid,  do  not  contribute  to  this  shift.  See,  e.g.,  J.  Meyer,  Passing  the  Health  Care 
Buck:  Who  Pays  the  Hidden  Cost?  (1983). 

'^"For-Profit  Enterprise,  supra  note  35,  at  100,  Table  5.2,  &  106  (public  subsidy 
of  $1.9  billion  in  1984). 

"'Hadley,  Mullner  &  Feder,  The  Financially  Distressed  Hospital,  307  New  Eng.  J. 
Med.  1283  (1982).  This  study  focused  on  hospitals  for  which  uncompensated  care  plus 
Medicaid  constituted  24%  or  more  of  charges. 

'*^The  only  estimates  of  non-hospital  charity  with  which  the  authors  are  familiar 
confirm  this  expectation.  One  estimate  holds  that  physicians  provided  some  $2.9  billion 
of  free  care  in  1982.  See  G.  Bazzoli,  Health  Care  for  the  Indigent:  Literature 
Review  and  Research  Agenda  for  the  Future  (1985).  But  see  F.  Sloan,  J.  Valvona 
&  G.  HicKSON,  Analysis  of  Health  Care  Options  in  Tennessee:  Uncompensated  Care 
(Vanderbilt  Univ.  1985)  (Tennessee  doctors  provided  only  one-seventh  the  amount  of 
uncompensated  care  as  Tennessee  hospitals). 

''^Levit,  Lazenby,  Waldo  &  Davidoff,  National  Health  Expenditures,  1984,  Health 
Care  Financing  Rev.,  Fall  1985,  at  1,  9  [hereinafter  National  Health  Expenditures]  (in 
1984,  hospital  care  claimed  $157.9  billion  out  of  $341.8  of  personal  health  care). 

^See  infra  text  accompanying  notes  101-31. 


868  INDIANA  LAW  REVIEW  [Vol.  19:857 

Uncompensated  care  is  clearly  a  multibillion  dollar  problem  for 
hospitals,  presumably  a  smaller  one  for  other  providers.  It  is  likely  to 
have  totalled  about  $10  bilUon  in  1982  (assuming  that  two-thirds  or 
three-quarters  of  it  occurred  in  hospitals).  The  volume  of  uncompensated 
care  has  probably  grown  since  then,  as  the  next  subsection  discusses; 
certainly,  the  pressures  on  hospitals  have  increased. "^^ 

D.     Growing  Problems 

Recent  developments  have  made  access  to  insurance  and  care  more 
difficult  for  the  medically  indigent.  Not  only  has  the  number  of  uninsured 
grown  through  1984  (Table  1),  but  it  is  likely  to  continue  to  rise  in  the 
long  run,  despite  a  generally  improved  economy.  A  number  of  portents 
point  in  this  direction.  First,  the  normal,  "structural"  level  of  unem- 
ployment, below  which  the  percentage  of  people  looking  for  work  is 
not  apt  to  fall,  even  in  good  times,  seems  to  have  risen  above  the 
expected  3-4%  of  the  1970's  to  perhaps  5-6^^0  or  more.  Few  of  the 
unemployed  have  employer-paid  health  coverage. "^^  Second,  employment 
patterns  also  seem  to  be  undergoing  a  structural  shift.  To  oversimpHfy, 
the  United  States  is  moving  from  manufacturing  to  service  jobs,  from 
unionized  to  nonunionized  work  forces,  from  mainly  full-time  to  in- 
creasingly part-time  workers,  and  from  large  employers  to  smaller  ones — 
all  moves  from  well-insured  types  of  employment  to  less  well-covered 
ones."^"^ 

Finally,  the  recent  federal  tax  reform  bilP  reduces  the  incentives 
for  companies  and  workers  alike  to  shelter  income  in  tax-free  benefits 
like  health  insurance.  Business  in  the  aggregate  will  be  paying  considerably 
more  federal  income  tax  (although  at  a  lower  official  marginal  rate), 
which  should  make  companies  even  more  zealous  about  cutting  corporate 


"^Large  as  $10  billion  may  seem,  it  is  not  large  in  relation  to  some  31  million 
uninsured  people  in  1982  {see  supra  Table  1).  Per  capita,  that  amounts  to  little  more 
than  $300  for  the  year,  far  less  than  1982's  $1,184  per  capita  spending  for  the  general 
population.  National  Health  Expenditures,  supra  note  43,  at  16.  It  may  be  safely  assumed 
that  this  amount  of  charity  care  did  not  meet  all  the  medical  needs  of  the  medically 
indigent,  given  the  extent  to  which  the  uninsured  receive  less  care  (see  supra  Table  4). 
Meeting  those  needs  on  a  prepayment  basis  would  be  substantially  more  costly.  See  infra 
notes  257-58. 

*^See  supra  note  20. 

^'Black,  Comment  on  "The  Employed  Uninsured  and  the  Role  of  Public  Policy," 
23  Inquiry  209  (1986);  Monheit,  supra  note  24.  Black's  and  Monheit's  observations  rest 
mainly  on  1977  data  about  employment  and  insurance  coverage.  Unpublished  research  on 
changes  in  insurance  status  during  1980-86  by  Stephen  M.  Long  and  Jack  Rodgers  of  the 
Congressional  Budget  Office  disputes  some  of  the  details  of  these  findings,  arguing  that 
long-term  structural  changes  do  not  explain  the  rapid  rise  in  the  number  of  uninsured  in 
the  early  1980's. 

^«Tax  Reform  Act  of  1986,  Pub.  L.  No.  99-514,  100  Stat.  2085;  Summary  of  Con- 
ference Agreement  on  H.R.  3838,  Tax  Notes,  Sept.  8,   1986,  at  985. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  869 

health  benefits  than  they  have  already  been/^  Individuals  will  pay  less 
federal  tax  overall,  and  at  lower  marginal  rates,  especially  at  the  high 
and  low  ends  of  the  scale.  High-income  and  low-income  taxpayers  alike 
will  thus  find  tax-free  health  benefits  considerably  less  attractive  than 
before,  compared  with  the  alternative  of  higher  cash  income. 

At  the  same  time,  the  cost  of  offering  workplace  health  benefits 
has  been  raised  by  numerous  government  requirements  in  the  form  of 
'^mandated  benefits,"  thus  making  insurance  benefit  packages  richer  for 
some^^  and  more  available  to  others,  including  the  recently  unemployed 
and  divorced  dependents.^'  These  developments  are  helpful  in  some  regard 
to  those  already  in  well-insured  positions  but,  again,  do  not  ease  the 
difficulties  of  the  marginal  company  and  its  workers  in  attempting  to 
get  affordable  health  coverage.  All  of  these  trends  seem  to  indicate  that 
the  future  will  see  more  people  without  health  coverage,  not  fewer. 

Meanwhile,  uncovered  people  also  seem  to  face  even  greater  problems 
in  obtaining  care — especially  if  they  cannot  prepay  in  cash,  at  least  in 
part.  The  main  reason  is  that  the  ability  of  hospitals  to  cross-subsidize 
care  to  the  indigent  seems  to  be  declining.  All  providers,  including 
hospitals,  face  increased  price  competition  from  their  competitors  as  well 
as  greater  price  resistance  from  their  customers.  Both  developments  have 
adverse  implications  for  the  uninsured,  at  least  in  the  short  run." 

Hospitals  generally  seem  to  manage  the  extent  to  which  they  provide 
uncompensated  care  in  order  to  match  their  fiscal  capacity. ^^  It  is  safe 
to  assume  that  they  will  cut  back  if  increased  price  competition  threatens 
their  earnings  or  their  ability  to  attract  paying  patients.  Cutback  strategies 
will  include  choosing  locations  and  services  attractive  to  insured  rather 
than  uninsured  populations,  avoiding  services  like  obstetrics  and  emer- 
gency treatment  of  trauma  that  often  go  uncompensated,  and  screening 
out  or  transferring  indigents  or  requiring  deposits  from  them,  at  least 
for  non-emergency  care.^"* 

Although  almost  all  hospitals  provide  some  level  of  charity  care,  in 
most  locations  the  institutional  provider  of  last  resort,  if  one  exists,  is 
the  pubUc  hospital.  Anecdotal  evidence  indicates  that  the  demand  for 


'^^See  supra  notes  22  &  23. 

5°State  laws  regulating  insurance  have  for  a  decade  or  more  been  altered  to  require 
insurance  plans  to  include  mental  health  benefits,  among  others.  One  estimate  is  that 
nearly  600  such  statutes  exist.  Demkovich,  Covering  Options  Through  Mandated  Benefits, 
Bus.  &  Health,  Jan. /Feb.  1986,  at  27  (more  than  580  laws  at  the  end  of  1984,  requiring 
coverage  of  everything  from  alcoholism  services,  in  38  states,  to  hospices,  in  5  states, 
with  an  almost  equal  number  of  new  bills  pending). 

^^See  infra  note  207  on  the  federal  "COBRA"  entitlements  allowing  continuance  as 
a  group  member  even  after  layoff,  divorce,  or  other  separation  from  the  group. 

"See,  e.g.,  Kinzer,  Care  of  the  Poor  Revisited,  21  Inquiry  5  (1984). 

"Hadley,  Mullner  &  Feder,  supra  note  41, 

^■♦For-profit  Enterprise,  supra  note  35,  at  104-05. 


870  INDIANA  LAW  REVIEW  [Vol.  19:857 

public  hospital  care  has  risen,  in  part  as  a  result  of  transfers  from  other 
hospitals. ^^  At  the  same  time,  state  and  local  governments  that  tradi- 
tionally have  funded  public  hospitals'  net  deficits  (after  collections  from 
Medicaid  and  other  third-party  payers)  often  have  found  themselves 
under  considerable  fiscal  pressure,  in  the  aftermath  of  recession  and  the 
"taxpayers'  revolt. "^^  Indeed,  a  number  of  public  hospitals  have  closed 
since  the  late  1970's,  perhaps  most  notably  Philadelphia's,"  and  there 
is  some  movement  toward  "privatizing"  others. ^^ 

For  the  future  generally,  some  observers  predict  closures  of  as  many 
as  one  thousand  of  today's  six  thousand  short-term  general  hospitals, 
both  public  and  private. ^^  The  remaining  hospitals  will  have  to  be  more 
concerned  with  competition  for  paying  patients  and  less  concerned  about 
indigent  care  (which  raises  prices).  Thus,  in  the  1990's,  it  is  quite  possible 
that  the  medically  indigent  will  have  less  access  to  care  than  they  do 
now,  unless  there  are  changes  in  public  policy. 

As  a  political  matter,  it  seems  undeniable  that  hospitals — not  the 
indigent  themselves — will  continue  to  be  largely  responsible  for  making 
"uncompensated  care/indigent  care"  a  legislative  issue. ^^  The  American 
Hospital  Association  has  recently  completed  a  report  on  indigent  care, 
and  almost  every  state  has  commissioned  a  task  force  on  the  topic. ^^ 
In  this  way,  hospitals  can  provide  an  effective  political  voice  for  their 
largely  disenfranchised  poor  patients. ^^ 

For  the  moment,  neither  the  administration  nor  the  Congress  seems 
inclined  to  assist  in  finding  solutions,  certainly  not  solutions  that  require 


^^See,  e.g.,  Schiff,  supra  note  5. 

'^See,  e.g..  There's  Life  Yet  in  Tax  Revolt,  The  Economist,  Aug.  30,  1986,  at  18. 

"Reportedly,  111  nonfederal,  short-term  general  hospitals,  19  of  which  were  state 
or  local  institutions,  closed  between  1980  and  1982.  Sloan,  Valvona  &  Mullner,  supra 
note  31,  at  26. 

^^Bovbjerg,  Held  &  Pauly,  Privatization  and  Bidding  in  the  Health  Care  Sector,  6  J. 
Pol'y  Analysis  &  Mgmt.  (1987)  (forthcoming). 

'^See,  e.g.,  Mullner  &  McNeil,  Rural  and  Urban  Hospital  Closures:  A  Comparison, 
Health  Aff.,  Fall  1986,  at  131. 

^See,  e.g.,  Richards,  Special  Interests  Push  Indigent  Care  Solutions,  Hospitals,  Oct. 
16,  1984,  at  106. 

^'American  Hospital  Ass'n,  Cost  and  Compassion:  Recommendations  for  Avoiding 
A  Crisis  in  Care  for  the  Medically  Indigent,  Report  of  the  Speclax  Committee  on 
Care  for  the  Indigent  (1986).  Most  of  the  state  studies  consider  their  topic  as  much 
"uncompensated  care"  as  "indigent  care."  For  a  summary  of  state  studies  during  1982- 
84,  see  J.  Luehrs  &  R.  Desonla,  A  Review  of  State  Task  Force  and  Speclu,  Study 
Recommendations  to  Address  Health  Care  for  the  Indigent  (1984)  (responses  of  21 
states  to  survey);  see  also  Nat'l  Conf.  of  State  Legislatures,  12  Questions:  What 
Legislators  Need  to  Know  About  Uncompensated  Hospital  Care  (undated,  issued 
1985). 

"See,  e.g..  Law,  A  Consumer  Perspective  on  Medical  Malpractice,  49  Law  & 
Contemp.  Probs.  305,  307  (1986). 


1986]  CARE  FOR  MEDICALLY  INDIGENT  871 

new  federal  funding. ^^  As  a  result,  states  and  localities  are  scrambling 
to  find  new  ways  to  bear  the  burden  of  financing  care  for  the  medically 
indigent. ^"^  This  Article  next  considers  the  legal  obligations  for  providing 
or  financing  care  and  concludes  with  an  examination  of  state  policy 
options  for  aiding  the  medically  indigent. 

III.     Legal  Rights  to  Health  Care  or  Coverage 


A.     Rights  and  Responsibilities 

The  supply  of  medical  care  for  the  medically  indigent  may  be 
diminishing,  but  there  is  no  shortage  of  statements  that  medical  care  is 
a  basic  human  * 'right."  Religious  leaders,  moral  philosophers,  politicians, 
and  even  some  judges  have  been  heard  from  on  this  score. ^^  Existing 
commentary  on  the  subject  is  voluminous^^  and  will  not  be  reviewed 
here.  Many  arguments  about  rights  occur  on  an  abstract,  philosophical 
plane.  One  underlying  ethical-legal  issue  is  whether  society  or  medical 


"In  post-Gramm-Rudmann  Washington,  concern  over  reducing  the  massive  federal 
deficit  seems  to  preclude  new  funding  initiatives.  The  administration  has  repeatedly  at- 
tempted to  cut  existing  indigent  health  programs  like  Medicaid,  see  R.  Bovbjerg  &  J. 
HoLAHAN,  supra  note  18,  and  community  health  centers,  see  G.  Peterson,  R.  Bovbjerg, 
B.  Davis,  W.  Davis,  E.  Durman  &  T.  Gullo,  The  Reagan  Block  Grants:  What  Have 
We  Learned  (1986)  [hereinafter  G.  Peterson].  Congress  has  protected  the  basic  scope 
of  Medicaid  and  some  other  existing  programs,  but  seems  unwilling  to  fund  new  ones. 
It  will  consider  mandates  for  employer  or  state  contributions,  but  not  new  federal  taxes. 
Thus,  COBRA  requires  employers  to  offer  group  insurance  continuation  benefits.  See 
infra  note  207.  "Risk  pool"  legislation  seriously  considered  but  not  passed  would  have 
required  states  to  help  pay  for  "insurance  of  last  resort"  for  the  otherwise  uninsured. 
Access  to  Health  Care  Bill,  S.  2402,  99th  Cong.,  2d  Sess.,  132  Cong.  Rec.  S5218  (1986) 
discussed  infra  at  note  290. 

^See  supra  notes  7  &  61;  infra  note  136. 

^^See,  e.g..  The  Labor  Day  Statement  of  Cardinal  John  J.  O'Connor  on  "The  Right 
to  Health  Care"  ("Every  person  has  a  basic  right  to  health  care  which  flows  from  the 
sanctity  of  life  and  the  dignity  of  human  persons"  (citing  1981  Pastoral  Letter  on  Health 
Care  from  American  Catholic  Bishops)),  excerpted  in  Health/PAC.  Bull.,  July /Aug. 
1985,  at  6-7;  WiUiams,  The  Idea  of  Equality,  in  Philosophy,  Politics,  and  Society  121- 
22  (P.  Laslett  &  W.  Ronciman  eds.  1962)  (It  is  a  "necessary  truth"  that  "the  proper 
ground  of  [medical]  treatment  is  need");  E.  Kennedy,  In  Critical  Condition  (1972) 
(especially  Chapter  10,  Good  Health  Care:  A  Right  for  All  Americans);  Memorial  Hosp. 
V.  Maricopa  County,  415  U.S.  250,  259  (1974)  (dictum)  ("[M]edical  care  is  as  much  'a 
basic  necessity  of  life'  to  an  indigent  as  welfare  assistance.  And  ...  of  greater  constitutional 
significance.  .  .  ."). 

^See,  e.g..  President's  Commission  for  the  Study  of  Ethical  Problems  in  Medicine 
and  Biomedical  and  Behavioral  Research,  Securing  Access  to  Health  Care,  Volume 
Two:  Appendices,  Socioculture  and  Philosophical  Studies  (1983)  (twelve  articles  on 
access  and  right  to  it,  each  referencing  various  literatures);  Fried,  Equality  and  Rights 
in  Medical  Care,  in  Implications  of  Guaranteeing  Medical  Care  3  (J.  Perpich  ed. 
1975). 


872  INDIANA  LAW  REVIEW  [Vol.  19:857 

providers  owe  the  same  care  to  all  or  whether  charitable  obligations  are 
limited  to  some  "decent  minimum"  of  care.^^  Legal  and  policy  analysis 
must  consider  how  any  such  rights  are  determined  and  what,  if  any, 
corresponding  responsibility  attaches. 

The  most  fundamental  right  to  health  care  would  be  one  derived 
from  federal  constitutional  provisions.  The  constitutional  authority  of 
the  federal  government  to  fund  health  care  for  the  medically  indigent 
is  indisputable,^^  and  the  federal-state  Medicaid  program  is  tangible 
evidence  of  that  authority. ^^  The  government  may  assume  by  statute  an 
obligation  to  fund  medical  care,  but  it  has  no  general  constitutional 
duty  to  do  so.  For  example,  the  government  may  cut  back  previously 
offered  Medicaid  benefits^°  and  may  refuse  to  fund  certain  care,  even 
care  considered  by  some  to  be  medically  necessary. 

The  abortion  cases  well  illustrate  the  distinction  between  a  patient's 
right  to  receive  care  and  a  public  obligation  to  pay  for  it.  A  patient's 
right  to  receive  an  abortion  cannot  be  unduly  restricted  by  government, 
but  this  limited  right  carries  no  corresponding  funding  obligations.^' 
Government  may  even  deny  funds  for  abortions  while  paying  for  similar 
treatments  under  Medicaid  or  other  programs. "^^ 

Two  limited  exceptions  prove  this  rule.  First,  people  involuntarily 
confined  to  mental  institutions  may  have  a  "right  to  treatment"  grounded 
in  substantive  due  process  or  even  in  the  eighth  amendment's  prohibition 
of  cruel  and  unusual  punishment.  A  number  of  lower  federal  courts 
have  so  held  in  cases  of  involuntary  civil  commitment. ^^  The  remedy 
for  institutionalization  without  adequate  treatment  is  not  easily  framed. 


^^Compare,  e.g..  President's  Commission  for  the  Study  of  Ethical  Problems  in 
Medicine  and  Biomedical  Research,  Summing  up:  Final  Report  on  Studies  of  the 
Ethical  and  Legal  Problems  in  Medicine  and  Biomedical  and  Behavior  Research 
29-30  (1983)  ("The  Commission  proposes  a  standard  of  'an  adequate  level  of  care'  for 
all,  not  'a  right  to  health  care'  that  offers  patients  access  to  all  beneficial  care,  to  all 
care  that  others  are  receiving,  or  to  all  that  they  need — or  want.")  and  Fried,  supra  note 
66  ("decent  standard  of  care  for  all")  with,  e.g.,  E.  Kennedy,  supra  note  65  (especially 
chapter  10,  Basic  Right  of  Access  for  All  to  Quality  Care). 

*^U.S.  Const.  Preamble  ("promote  the  general  welfare  .  .  ."). 

^'Social  Security  Act,  tit.  XIX,  42  U.S.C.  §§  1396  et  seq.  (1982  &  Supp.  1985). 

^"Generally,  states,  rather  than  the  federal  government,  are  sued  for  implementing 
cutbacks,  because  most  cutbacks  have  historically  been  undertaken  at  state  discretion  rather 
than  by  federal  mandate.  See.  e.g.,  Alexander  v.  Choate,  469  U.S.  287  (1985)  (Tennessee 
cut  of  hospital  coverage  to  14  inpatient  days  held  valid).  In  contrast,  federal  eligibility 
cutbacks  in  1981  received  no  judicial  challenge. 

^'Beal  V.  Doe,  432  U.S.  438  (1977);  Roe  v.  Wade,  410  U.S.  113  (1973). 

"Harris  v.  McRae,  448  U.S.  297  (1980). 

''See,  e.g.,  Wyatt  v.  Aderholt,  503  F.2d  1305  (5th  Cir.  1974);  Rouse  v.  Cameron, 
373  F.2d  451  (D.C.  Cir.  1966),  appeal  after  remand,  387  F.2d  241  (D.C.  Cir.  1967); 
Wyatt  V.  Stickney:  Retrospect  and  Prospect  (L.  Jones  &  R.  Parlour  eds.  1981).  See 
generally  D.  Wexler,  Mental  Health  Law:  Major  Issues  (1981). 


1986]  CARE  FOR  MEDICALLY  INDIGENT  873 

but  courts  generally  require  either  deinstitutionalization,  sometimes  also 
with  treatment, "^"^  or  improved  institutional  care,  going  beyond  the  merely 
custodial. ^^  Determining  precisely  what  care  is  required  and  at  what  cost 
proves  rather  difficult  in  practice.^^  The  Supreme  Court  has  given  only 
limited  support  to  even  this  narrow  concept  of  a  right  to  mental  health 
treatment,^^  and  the  recent  trend  seems  to  disfavor  such  litigation. ^^ 

The  second  exception  entitles  incarcerated  prisoners  to  adequate 
health  care.  Traditionally,  what  little  health  care  was  available  in  jails 
and  prisons  was  very  poor.^^  A  series  of  lawsuits  has  established  that 
prison  inmates  must  be  given  at  least  that  level  of  care  that  prevents 
their  medical  situation  from  being  cruel  and  unusual  punishment. ^°  Again, 
precisely  what  level  of  care  meets  the  constitutional  minimum  is  not 
clear,  nor  is  the  extent  to  which  a  prisoner  must  contribute  toward  his 
own  care.^^ 

These  two  exceptions  are  readily  understood.  Both  institutionalized 
mental  patients  and  prisoners  are  individually  made  wards  of  the  state. 
It  is  an  easy  step  to  hold  that  the  act  of  taking  away  their  liberty  (and 
with  it  their  capacity  to  help  themselves  or  to  seek  private  charity) 
requires  the  government  to  give  them  in  return  a  reasonable  level  of 
medical  care,  along  with  humane  treatment  in  other  regards. ^^  These 


^^Callahan  v.  Carey,  N.Y.LJ.,  Dec.  11,  1979,  at  10,  col.  5  (N.Y.  Sup.  Ct.  Dec. 
10,  1979). 

^^See,  e.g.,  Wyatt  v.  Stickney:  Retrospect  and  Prospect,  supra  note  73. 

^^See  id.;  see  also  Miller,  The  "Right  to  Treatment":  Can  The  Courts  Rehabilitate 
and  Cure?,  46  The  Public  Interest  96  (1977). 

''See,  e.g.,  McNeil  v.  Director,  Patuxent  Inst.,  407  U.S.  245  (1972)  (holding  that 
the  state  of  Maryland  could  not  confine  appellant  indefinitely  on  basis  of  administrative 
referral  for  observation  under  "defective  delinquent"  law;  dictum  noted  remarkable  rarity 
of  litigation  to  set  "substantive  constitutional  limitations  on  this  [civil  commitment]  power"). 

'^See,  e.g.,  Jones  v.  United  States,  463  U.S.  354  (1983)  (civil  commitment  of  convicted 
criminal  upheld  despite  not  meeting  standards  for  independent  civil  commitment);  Young- 
berg  V.  Romeo,  457  U.S.  307  (1983)  (constitutional  "right  to  habilitation"  grounded  on 
deprivation  of  personal  freedom  and  safety,  not  on  extent  of  available  medical  treatment); 
Pennhurst  State  School  v.  Halderman,  451  U.S.  1,  18  (1982)  (poorly  treated  mentally 
retarded  patients  not  entitled  to  redress  against  the  state  under  federal  handicapped  statute; 
Congress  did  not  intend  to  require  states  "to  assume  the  high  cost  of  providing  'appropriate 
treatment'  "  in  exchange  for  federal  funds). 

'^See,  e.g.,  S.  Goldsmith,  Prison  Health:  Travesty  of  Justice  (1975). 

^^See  generally  Neisser,  Inmate  Welfare  Funds:  Reassessing  Prisoner  Assessments, 
in  Prisoners  and  the  Law  16-1,  16-18  through  16-20  (I.  Robbins  ed.  1985);  Neisser,  Is 
there  a  Doctor  in  the  Joint?  The  Search  for  Constitutional  Standards  for  Prison  Health 
Care,  63  Va.  L.  Rev.  921  (1977). 

«'In  City  of  Revere  v.  Massachusetts  General  Hospital,  463  U.S.  239  (1983),  the 
Supreme  Court  carefully  refrained  from  deciding  to  what  extent  the  hospital  could  collect 
from  the  patient,  who  was  granted  bail  while  hospitalized  with  wounds  received  during 
arrest,  stating  that  this  was  a  matter  of  state  law.  Id.  at  245-46, 

«2C/.  Wyatt  V.  Aderholt,  503  F.2d  1305,  1312  (5th  Cir.  1974)  (treatment  is  "the 
quid  pro  quo  society  [has]  to  pay  as  the  price  of  .  .  .  denial  of  individuals'  liberty"). 


874  INDIANA  LAW  REVIEW  [Vol.  19:857 

exceptional  cases  do  not  support  a  fundamental  positive  "right  to  health 
care,"  but  there  may  be  a  fundamental  negative  right  allowing  a  sort 
of  "free  exercise."  Thus,  whereas  certain  aspects  of  medical  practice 
are  subject  to  restrictions  under  licensure  or  economic  regulation, ^^  courts 
have  recognized  the  importance  of  professional  freedom^  and  patients' 
free  choice,^^  even  the  choice  not  to  receive  care  of  any  sort.^^ 

However,  for  the  most  part,  the  medically  indigent  have  only  those 
entitlements  that  have  been  voluntarily  enacted,  in  whole  or  in  part,  to 
help  them.^'^  Each  statute — Medicare,  veterans'  coverage,  maternal  and 
child  health,  and  so  on — carries  with  it  greater  or  lesser  entitlements  to 
a  more  or  less  defined  population.  The  negative  imphcation  of  each 
program  of  special  assistance  is  that  no  general  federal  obligation  exists. 

Beyond  basic  federal  law,  there  are  three  other  possible  sources  of 
indigent  rights.  These  are  the  duties  of  providers,  of  states  and  localities, 
and  of  health  insurers. 

B.     Obligations  of  Health  Care  Providers 

1.  Physicians,  a.  Duty  to  treat. — Although  physicians  may  vol- 
untarily provide  charity  care  to  the  indigent,  they  have  no  affirmative 
legal  duty  to  do  so.  Like  anyone  else,  physicians  are  free  not  to  render 
aid  even  in  an  emergency.^*  Any  assistance  that  a  physician  may  gra- 
tuitously render  is  considered  the  act  of  a  "good  Samaritan. "^^  This 
same  view  has  been  echoed  by  numerous  courts  across  the  nation,  and 
stands  unchanged  by  statute. ^'^ 

Most  legal  doctrine  on  the  subject  arises  from  malpractice  law, 
enforced  through  tort  suits  for  damages.  Doctors  are  remarkably  free 
of  legal  duty  to  treat  anyone,  paying  customers  and  the  impecunious 
alike.   The  classic  statement  of  this  non-duty  comes   from  Hurley  v. 


''See,  e.g.  Ind.  Code  §§  25-22.5-1-1  et  seq.  (1982). 

«^C/.  Roe  V.  Wade,  410  U.S.  113,  163  (1973)  (importance  of  noninterference  with 
doctors'  judgment). 

«^The  malpractice  rule  that  patients  must  give  "informed  consent"  is  based  on  the 
importance  of  personal  sovereignty.  See  generally  J.  Katz,  The  Silent  World  of  Doctor 
AND  Patient  (1984). 

'"•In  re  Quinlan,  70  N.J.  10,  355  A. 2d  647  (1976),  is  the  seminal  case.  For  a  full 
discussion,  see  President's  Commission  for  the  Study  of  Ethical  Problems  in  Medicine 
and  Biomedical  and  Behavioral  Research,  Deciding  to  Forgo  Life-Sustaining  Treat- 
ment: Ethical,  Medical,  and  Legal  Issues  in  Treatment  Decisions  (1983). 

«^On  federal  medical  programs,  see  generally  F.  Wilson  &  D.  Neuhauser,  Health 
Services  in  the  United  States  137-228  (2d  ed.  1982). 

'^See  Restatement  (Second)  of  Torts  §  314  comment  c  (1965). 

'^State  law  typically  protects  such  medical  Samaritans  from  ordinary  negligence  actions. 
See,  e.g.,  Ind.  Code  §§  34-4-12-1  to  -2  (1982). 

^See  e.g..  Harper  v.  Baptist  Medical  Center-Princeton,  341  So.  2d  133  (Ala.  1976); 
Childers  v.  Frye,  201  N.C.  42,  158  S.E.  744  (1931);  Lyons  v.  Grether,  218  Va.  630,  239 
S.E.2d  103  (1977). 


1986]  CARE  FOR  MEDICALLY  INDIGENT  875 

Eddingfield,^^  a  turn-of-the-century  case  in  which  the  Indiana  Supreme 
Court  ruled  that  a  physician  had  no  duty  to  treat  anyone.  The  court 
saw  no  common  law  duty,  even  though  the  doctor  was  not  otherwise 
occupied,  the  would-be  patient  was  very  sick  (he  later  died),  was  a 
former  patient  of  the  refusing  physician,  and  tendered  payment  in  advance. 
The  court  rejected  any  medical  analogy  with  the  common  law  duty  of 
innkeepers  to  serve  all  comers  as  well  as  the  argument  that  the  then  recently 
enacted  state  regulatory  scheme  of  physician  licensure  had  created  such 
a  duty.  This  minimalist  legal  view  of  physicians'  obligations  to  would-be 
patients  has  long  been  an  accepted  tenet  of  organized  medicine  as  well 
as  of  the  law.'^  The  traditional  rule  that  physicians  are  free  to  reject  anyone 
as  a  patient  may  have  been  tempered  somewhat  by  civil  rights  legisla- 
tion," but  medical  indigency  is  not  a  protected  civil  rights  category. 

A  physician's  legal  duty  to  treat  a  patient  arises  only  from  mutual 
consent — by  express  contract  or  by  one  implied  by  the  parties'  behavior. 
Whether  this  contractual  physician-patient  relationship  exists  is  a  factual 
question  that  turns  upon  whether  the  physician  accepted  the  case  and 
whether  the  patient  accepted  the  physician's  professional  services. ^"^  Under 
certain  circumstances,  some  courts  have  inferred  a  duty  to  treat  even 
absent  specific  consent.  For  example,  an  Arizona  court  ruled  that  a 
physician  on  the  staff  of  a  hospital  who  agreed  to  be  an  "on-call" 
emergency  room  doctor  could  no  longer  refuse  treatment  to  an  individual 
seeking  emergency  care.^^  A  New  York  court  found  a  physician-patient 
relationship  based  solely  on  a  telephone  conversation  between  a  hospital 
physician  and  an  emergency  room  visitor,  even  though  the  physician 
was  said  mainly  to  have  directed  the  patient  to  see  his  own  doctor. ^^ 
For  the  most  part,  however,  mutual  consent  remains  a  requirement. 


"156  Ind.  416,  59  N.E.   1058  (1901). 

^^Am.  Med.  Ass'n,  Principles  of  Medical  Exmcs  §  6  (1985);  cf.  Relman  &  Reinhardt, 
An  Exchange  on  For-Profit  Health  Care,  in  For-Profit  Enterprise,  supra  note  35,  at 
209  (lack  of  duty  to  serve  shows  profit  orientation  of  physicians). 

"^^See  generally  Nat'l  Health  Law  Program,  Manual  on  State  and  Local  Gov- 
ernment Responsibilities  to  Provide  Medical  Care  for  Indigents  163-71  (M.  Dowell 
ed.  1985)  [hereinafter  State  and  Local  Government  Responsibilities]  (Chapter  IV, 
"Access  to  Health  Care  and  Civil  Rights  Legislation"). 

^"Lyons,  218  Va.  630,  239  S.E.2d  103;  see  also  61  Am.  Jur.  2d  Physicians,  Surgeons, 
and  Other  Healers  §  96  (1972). 

^'Hiser  v.  Randolph,  126  Ariz.  608,  617  P.2d  774  (Ariz.  Ct.  App.  1980),  overruled 
on  other  grounds,  Thompson  v.  Sun  City  Community  Hosp.,  Inc.  141  Ariz.  597,  688 
P. 2d  605  (Ariz.  1984)  (The  court  in  Thompson  also  distinguished  Hiser  on  the  issue  of 
the  physicians'  duty  to  treat  in  emergency  situations).  But  see,  e.g.,  Wilmington  Gen. 
Hosp.  V.  Manlove,  54  Del.  15,  174  A.2d  135  (1961);  Richard  v.  Adair  Hosp.  Found. 
Corp.,  566  S.W.2d  791  (Ky.  Ct.  App.  1978).  See  infra  discussion  at  notes  112-20  on 
emergency  care  and  duty  to  serve. 

^O'Neill  V.  Montefiore  Hosp.,  11  A.D.2d  132,  202  N.Y.S.2d  436  (1960). 


876  INDIANA  LAW  REVIEW  [Vol.  19:857 

b.  Standard  of  care  and  extent  of  treatment. — Once  a  patient-phy- 
sician relationship  has  been  estabHshed,  the  physician  must  exercise  the 
same  standard  of  care — customary  skill  and  diligence^^ — regardless  of 
whether  the  patient  is  an  indigent  or  a  paying  customer.  Even  when 
physicians  render  their  services  gratuitously,  their  potential  liability  for 
negligence  or  malpractice  remains  the  same  as  in  treating  any  other 
patient. ^^ 

Having  once  begun  treatment,  a  physician  must  continue  treatment 
as  long  as  medical  care  is  necessary  or  face  a  possible  malpractice  action 
for  abandonment  if  actionable  damage  occurs. ^^  Physicians  may  safely 
withdraw  from  a  case  only  when  services  are  no  longer  needed,  when 
the  patient  voluntarily  terminates  the  relationship,  when  referral  is  made 
to  an  equally  qualified  practitioner,  or  when  the  patient  has  a  reasonable 
opportunity  to  see  another  physician. '°° 

2.  Hospitals,  a.  Duty  to  treat. — As  a  general  matter,  private  hospitals, 
like  physicians,  have  no  legal  duty  to  accept  all  potential  patients  seeking 
care,  except  perhaps  in  emergency  situations. ^°'  Public  hospitals,  by 
statute,  by  charter,  or  by  tradition,  generally  are  obligated  to  accept  all 
patients,  at  least  in  emergencies, '°^  but  the  ''right"  of  admission  to  public 
hospitals  for  non-emergency  cases  is  not  absolute. ^°^ 

Even  more  than  that  of  physicians,  hospitals'  discretion  to  refuse 
patients  is  limited  by  civil  rights  provisions, '^'^  but  in  general,  ability  to 
pay  can  be  considered  in  deciding  whether  to  treat.  Indeed,  absent  an 
emergency,  a  hospital  may  require  a  cash  deposit  as  a  condition  of 
admission. ^°^  Significantly,  in  only  about  half  of  the  states  are  hospitals 


'The  classic  article  is  McCoid,  The  Care  Required  of  Medical  Practitioners,  12 
Vand.  L.  Rev.  549  (1959);  see  also  A.  Holder,  Medical  Malpractice  Law  40-43,  53- 
55  (1975). 

"'See,  e.g..  Rule  v.  Cheeseman,  181  Kan.  957,  317  P.2d  472,  477  (1957)  (the  fact 
that  the  patient  was  a  charity  patient  was  immaterial  in  determining  the  surgeon's  neg- 
ligence); see  also  70  C.J.S.  Physicians  and  Surgeons  §  52  (1951). 

"""See,  e.g.,  A.  Holder,  supra  note  97,  at  374-402. 

'""Lyons  v.  Grether,  218  Va.  630,  239  S.E.2d  103  (1977);  see  also  Annotation,  Liability 
of  Physician   Who  Abandons  Case,  57  A.L.R.2d  432,  439  §  3  (1958). 

'°'See,  e.g.,  Birmingham  Baptist  Hosp.  v.  Crews,  229  Ala.  398,  157  So.  224  (1934) 
(physician  in  emergency  room  diagnosed  child's  advanced  diphtheria  and  began  treatment 
but  hospital  denied  admission  because  the  disease  was  contagious;  held  no  liability  for 
later  death);  Hill  v.  Ohio  County,  468  S.W.2d  306  (Ky.  1971),  cert,  denied,  404  U.S. 
1041  (1972)  (pregnant  woman  had  no  right  to  hospital  admission,  absent  emergency);  see 
also  A.  SouTHWiCK,  The  Law  of  Hospital  and  Health  Care  Administration  161-62 
(1978). 

'"^See  Wilmington  Gen.  Hosp.  v.  Manlove,  54  Del.  15,  174  A.2d  135  (1961)  (dictum 
on  public  hospital  duty);  A.  Southwick,  supra  note  101,  at  162-64. 

"^^See  A.  Southwick,  supra  note  101,  at  163. 

^'^See  State  and  Local  Government  Responsibilities,  supra  note  93,  at  163-71. 

'°^Joyner  v.  Alton  Ochsner  Medical  Found.,  230  So.  2d  913  (La.  App.  1970)  (auto 
accident  victim  given  emergency  treatment  but  refused  admission). 


1986]  CARE  FOR  MEDICALLY  INDIGENT  Sll 

legally  required  to  have  emergency  rooms. ^^^ 

As  with  physicians,  once  a  hospital  begins  to  provide  diagnosis  and 
treatment  for  an  indigent  patient,  it  is  held  to  the  same  standard  of 
care  as  for  any  other  patient.  ^^^  Particularly  when  financial  considerations 
prompt  an  early  discharge  of  a  patient,  the  hospital  may  be  found  liable 
for  damages  in  a  tort  suit  for  abandonment. ^^^ 

However,  tort  actions  constitute  an  abysmal  enforcement  tool  for 
achieving  access  to  care.  Only  those  emergency  refusals  that  result  in 
compensable  damages  are  normally  actionable,  and  severe  damage  is 
usually  needed  to  justify  the  expense  of  a  suit.  Indigents  are  also 
disadvantaged  because  their  economic  damages  are  likely  to  be  low  and 
they  may  have  poor  access  to  legal  assistance. ^°^  Moreover,  if  indigents 
are  receiving  public  assistance,  they  may  not  be  allowed  to  keep  much 
of  any  recovery. 

Malpractice  doctrine  is,  therefore,  of  little  help  to  indigents  seeking 
care."^  Indeed,  if  anything,  malpractice  law  may  actually  hurt  indigents' 
access  to  private  care,  because  offering  any  care  may  make  a  provider, 
especially  a  hospital,  liable  to  provide  all  needed  care,  perhaps  entirely 
without  recompense.  It  is  precisely  this  concern  that  presumably  prompts 
'*  dumping." 

One  way  to  reduce  the  malpractice  incentive  to  dump  patients  would 
be  to  grant  immunity  from  tort  actions  to  providers  that  conform  to 
the  coverage  and  utilization  requirements  of  any  applicable  indigent  care 
program.  The  existing  federal  Professional  Review  Organization  (PRO) 
legislation  provides  such  immunity  with  regard  to  the  appropriateness 


'°*About  half  of  states  directly  or  indirectly  require  certain  categories  of  hospitals  to 
have  emergency  facilities.  A.  Southwick,  supra  note  101,  at  183-84.  See,  e.g..  III.  Ann. 
Stat.  ch.  Ill  1/2,  para.  86,  87  (Smith-Hurd  1977  &  Supp.  1986)  (private  and  public 
hospitals  providing  general  medical  or  surgical  services);  Pa,  Stat.  Ann.  tit.  62,  §  443.3 
(Purdon  1986)  (all  hospitals  receiving  payments  from  Department  of  Public  Welfare). 
State  and  Local  Government  Responsibilities,  supra  note  93,  provides  a  table  of 
emergency  care  laws;  on  tax  rules,  see  id.  at  489-90. 

'"^Hospital  Law  Manual  1  1-3  (1981). 

'°«See  e.g.,  Meiselman  v.  Crown  Heights  Hosp.,  285  N.Y.  389,  34  N.E.2d  367  (1941) 
(hospital  discharged  patient  when  open  wounds  were  still  draining);  Jones  v.  City  of  New 
York,  Hosp.  for  Joint  Diseases,  134  N.Y.S.2d  779  (N.Y.  Sup.  Ct.  1954),  rev'd  on  other 
grounds,  286  A.D.  825,  143  N.Y.S.2d  628  (1955)  (transfer  of  a  stabbing  victim  who  later 
died  was  for  hospital  convenience  rather  than  necessity  and  thus  actionable). 

•°^he  last  point  is  not  self-evident,  given  free  legal  assistance  as  a  free  point  of 
entry  and  the  wide  availability  of  the  private,  contingent-fee  personal  injury  bar.  No  direct 
evidence  on  this  point  seems  to  exist.  The  only  major  empirical  analysis  of  medical 
malpractice,  however,  provides  indirect  evidence,  that  the  incidence  of  claims  does  not 
vary  by  differences  in  per  capita  income  or  in  the  proportion  of  people  on  welfare  among 
states.  P.  Danzon,  Medical  Malpractice:  Theory,  Evidence,  and  Public  Policy  75 
(1985). 

"°See  Law,  supra  note  62,  at  306-15;  Rosenblatt,  Rationing  "Normal"  Health  Care: 
The  Hidden  Legal  Issues,  59  Texas  L.  Rev.  1401,  1410-15  (1981). 


878  INDIANA  LAW  REVIEW  [Vol.  19:857 

of  treatment  when  Medicare  has  denied  payment. ^^^  However,  a  broader 
immunity  provision  could  apply  equally  to  coverage  issues  as  well  as  to 
issues  of  appropriateness.  Under  such  a  provision,  a  hospital  would  be 
immune  from  suit  if  it  failed  to  provide  uncompensated  care  beyond 
that  covered  under  the  indigency  care  program. 

Of  course,  there  are  other  ways  to  discourage  providers  from  trans- 
ferring patients,  at  least  emergency  patients,  inappropriately.  New  federal 
legislation  specifically  addresses  inappropriate  transfers. 

b.  Emergency  room  as  a  source  of  duty  to  treat. — Under  1986 
federal  legislation,  hospitals  that  operate  emergency  rooms  and  that 
participate  in  the  Medicare  or  Medicaid  programs  must  follow  certain 
protocols  in  assessment,  treatment,  and  transfer  of  emergency  patients 
(including  patients  arriving  in  active  labor). ^^^  The  duty  appHes  to  all 
patients,  not  merely  to  public  program  beneficiaries. ^'^ 

This  legislation  was  passed  in  response  to  growing  concern  over 
refusals  of  care  and  "dumping"  of  patients  on  public  facilities. ^'"^  Bas- 
ically, affected  hospitals  must  examine  all  patients  and  then  either  accept 
them  for  full  treatment  or  at  least  sta^bilize  their  condition  so  that  they 
can  be  safely  transferred.  UnstabiHzed  patients  may  be  transferred  only 
with  their  express  consent  or  when  the  transfer  is  certified  to  be  in  their 
own  interest. ^'^  The  federal  act  specifically  states  that  it  does  not  preempt 
state  rules  except  when  they  are  plainly  inconsistent  with  federal  re- 
quirements.'^^ Clearly  the  state  remains  free  to  enforce  more  stringent 
standards. 

The  federal  act  was  in  many  ways  modeled  upon  landmark  Texas 
legislation  that  took  effect  the  week  before  the  federal  action. ''"^  Under 
the  Texas  law,  a  physician  must  examine  all  emergency  patients  within 

'"42  U.S.C.  §  1320c-6(c)  (1982).  This  little  known  and  little  used  provision  was  also 
included  in  the  predecessor  PSRO  legislation.  It  applies  to  Medicare,  and  to  Medicaid  as 
well  where  the  state  elects  to  use  the  PRO  to  perform  Medicaid  review. 

•'^Consolidated  Omnibus  Budget  Reconciliation  Act  of  1985,  Pub.  L.  No.  99-272, 
§  9121,  100  Stat.  82,  164  et.  seq.  (COBRA,  approved  Apr.  7,  1986).  Almost  all  hospitals 
participate  in  one  or  both  of  these  programs,  and  many  have  emergency  rooms.  See  supra 
note  106. 

"The  legislation's  constitutionality  might  be  challenged  on  the  ground  that  no  le- 
gitimate purpose  is  served  by  requirements  for  non-Medicare  persons  as  well  as  for  Medicare 
beneficiaries.  In  defense,  one  could  argue  that  it  is  unwise,  in  emergency  circumstances, 
to  make  distinctions  among  various  patients  according  to  their  insurance  status. 

'"•See  supra  notes  4  &  5. 

"^Specifically,  transfers  before  stabilization  or  during  active  labor  may  occur  only  at 
the  request  of  the  patient  or  upon  certification  of  the  physician  that  the  medical  benefits 
expected  from  transferring  outweigh  the  risks  of  effecting  the  transfer.  In  addition,  transfers 
may  be  made  only  to  facilities  with  available  space  and  qualified  personnel  who  have 
agreed  to  accept  the  transfer  and  to  provide  appropriate  medical  treatment. 

"^Consolidated  Omnibus  Budget  Reconcilation  Act  of  1985,  Pub.  L.  No.  99-272, 
§  9121,  100  Stat.  82. 

"Texas  Indigent  Health  Care  and  Treatment  Act,  Tex.  Rev.  Stat.  Ann.  art.  4438f 
(Vernon  Supp.  1986).  See  Chershov,  Texas  Transfer  Law  Still  Spurs  Controversy,  Hospitals, 
May  5,  1986,  at  160. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  879 

twenty  minutes  of  their  arrival.  Patients  are  to  be  stabilized  before  any 
transfer,  and  the  receiving  hospitals  and  physicians  must  agree  to  the 
transfer. 

In  the  absence  of  applicable  statutory  enactments,  emergency  treat- 
ment and  transfer  is  governed  mainly  by  malpractice  law.  In  this  con- 
nection, many  state  courts  have  held  that  operating  an  emergency  room 
creates  a  duty  to  treat  emergency  cases  regardless  of  payment. *^^  However, 
not  all  courts  have  accepted  the  emergency  room  exception  to  the  general 
no-duty  rule,'^^  and  some  have  rejected  it.^^^ 

c.  The  Hill-Burton  Act  as  a  source  of  duty  to  treat. — In  the  past, 
many  hospitals  have  accepted  federal  capital  grants  or  loans  under  the 
Hill-Burton  program. ^^^  The  terms  of  these  grants  obligate  hospitals  to 
provide  a  "reasonable  volume"  of  free  or  below-cost  services  to  persons 
unable  to  pay  for  hospital  care.  Until  the  1970's,  it  was  unclear  exactly 
how  much  care  hospitals  were  required  to  provide  (i.e.,  what  was  a 
^'reasonable  volume")  and  to  whom  they  were  to  provide  it.  In  1970, 
a  federal  district  court  found  that  a  private  civil  action  could  be  implied 
under  the  Hill-Burton  Act  because  the  Act  was  designed  in  part  to 
benefit  directly  those  persons  unable  to  pay  for  medical  services. ^^^  Upon 
review,  the  circuit  court  held  that  individual  hospitals  could  not  be 
expected  to  supply  all  the  services  needed  by  indigents  in  their  states. ^^^ 

Accordingly,  the  Secretary  of  Health,  Education,  and  Welfare  (now, 
the  Secretary  of  Health  and  Human  Services)  issued  clarifying  regulations 
on  what  amount  of  uncompensated  services  provided  by  a  hospital  would 
constitute  comphance  with  the  ''reasonable  volume"  requirement  of  the 
Hill-Burton  Act.  Even  with  continued  litigation  in  the  1970's  and  the 
revised  regulations,'^"^  the  Hill-Burton  Act  has  proven  difficult  to  en- 
force.'^^  Although  the  regulations  and  cases  tend  to  interpret  the  Hill- 


"«See  e.g.,  Hiser  v.  Randolph,  126  Ariz.  608,  617  P. 2d  774  (Ariz.  Ct.  App.  1980); 
Wilmington  Gen.  Hosp.  v.  Manlove,  54  Del.  15,  174  A. 2d  135  (1961);  Mercy  Medical 
Center  of  Oshkosh,  Inc.  v.  Winnebago  County,  58  Wis.  2d  260,  206  N.W.2d  198  (1973). 

"^See,  e.g.,  Campbell  v.  Mincey,  413  F.  Supp.  16  (N.D.  Miss.  1975)  (dictum  noting 
that  Manlove  not  universally  followed;  held,  no  emergency,  so  hospital  not  liable  under 
own  rules). 

^^^See,  e.g.,  Perth  Amboy  Gen.  Hosp.  v.  Board  of  Chosen  Freeholders,  158  N.J. 
Super.  556,  386  A. 2d  900  (1978);  Fabian  v.  Matzko,  236  Pa.  Super.  267,  344  A.2d  569 
(1975).  Compare  K.  Wing,  The  Law  and  the  Public's  Health  234-45  (2d  ed.  1985) 
(hospital  duty  in  emergency  not  settled  law)  with  A.  Southwick,  supra  note  101,  at  185- 
89  ("[m]ost  observers"  think  holding  that  emergency  room  creates  duty  "should  now  be 
accepted  as  the  rule."  Id.  at  187). 

'^'42  U.S.C.  §  291(c)(e)  (1982)  (The  Hospital  Survey  and  Construction  Act  of  1946). 

'^^Cook  V.  Ochsner  Found.  Hospital,  319  F.  Supp.  603  (E.D.  La.  1970),  aff'd,  559 
F.2d  968  (5th  Cir.   1977). 

'^'Cook,  559  F.2d  at  971. 

'^42  C.F.R.  §  124.503  (1979). 

'^^C/.  Blumstein,  Court  Action,  Agency  Reaction:  The  Hill-Burton  Act  as  a  Case 
Study,  69  Iowa  L.Rev.  1227  (1984);  Wing,  The  Community  Service  Obligation  of  Hill- 
Burton  Health  Facilities,  23  B.C.L.  Rev.  577  (1982). 


880  INDIANA  LAW  REVIEW  [Vol.  19:857 

Burton  Act  as  creating  entitlements  for  specific  classes  of  patients/^^  no 

individual  patient  has  a  claim  to  free  services. '^^  Furthermore,  even  though 

the  regulations  define  persons  "unable  to  pay,"  each  hospital  may  develop 

its  own  plans  for  distributing  charity  care.^^^ 

Some  $571  million  of  free  care  met  Hill-Burton  obligations  in  1984,^^^ 

a  figure  well  below  the  uncompensated  care  burden^  ^°  and  dwarfed  by 

apparent  need.  Even  this  amount  of  charity  care  is  likely  to  diminish 

in  the  future  because  Hill-Burton  "free  care"  obligations  normally  last 

for  twenty  years  and  the  grant  program  was  virtually  eliminated  in 
1974.131 

C     Obligations  of  States  and  Localities 

All  states  and  a  great  many  political  subdivisions  (counties,  towns, 
or  cities)  voluntarily  provide  or  finance  a  variety  of  health  services.  The 
largest  program  by  far  is  the  federal-state  Medicaid  program.  Participating 
states,  by  federal  requirement,  must  cover  certain  categorically  eligible 
poor  people  and  must  provide  certain  mandatory  benefits.  Additional 
coverage  may  be  added  at  a  state's  option  within  the  limits  of  federal 
financial  participation. ^^^  Medicaid's  contribution  to  preventing  medical 
indigency  is  well  known.  Medicaid  programs  have  by  and  large  ceased 
to  expand  to  cover  many  additional  people.  ^^^  Consequently,  this  Article 
does  not  further  describe  Medicaid  at  this  point. 

All  levels  of  government  provide  many  specialized  health  services 
for  the  general  population  and  general  services  for  specialized  populations. 
Classic  examples  are  treatment  or  immunizations  for  communicable  dis- 
eases and  care  for  handicapped  children.  ^^^^  Poor  people  often  receive 


'^Blumstein,  supra  note  125. 

'^^Newsom  v.  Vanderbilt  Univ.,  653  F.2d  1100,  1121  (6th  Cir.   1981). 

'2«42  C.F.R.  §  124.507  (1979). 

'^^State  and  Local  Government  Responsibilities,  supra  note  93,  at  35. 

'3°Sloan,  Valvona  &  Mullner,  supra  note  31,  at  19  ($1.7  billion  of  hospital-denominated 
charity  care  is  included  in  the  $6.2  biUion  of  uncompensated  care). 

'^'U.S.  Off.  OF  Mgmt.  &  Budget,  The  Budget  of  the  United  States  Government, 
Fiscal  Year  1975,  Appendix  415  (1974). 

^^^See  generally  R.  Bovbjerg  &  J.  Holahan,  supra  note  18. 

'"5ee  generally  J.  Holahan  &  J.  Cohen,  supra  note  18.  An  exception  is  limited 
expansions  targeted  at  needy  children  and  young  mothers,  including  expectant  mothers, 
authorized  by  1986  federal  legislation.  See  infra  note  224. 

'^^See  generally  F.  Grad,  Public  Health  Law  Manual  (1973);  Role  of  State  and 
Local  Governments  in  Relation  to  Personal  Health  Services  (S.  Jain  ed.  1981)  [here- 
inafter Role  of  State  and  Local  Governments]  (reprinted  from  71  Am.  J.  Pub.  Health 
1  (Supp.  Jan.  1981)).  State  and  Local  Government  Responsibilities,  supra  note  93,  cites 
statutory  authority  for  many  of  these  programs.  The  Association  of  State  and  Territorial 
Health  Officials  (ASTHO),  through  its  Public  Health  Foundation,  publishes  several  annual 
compilations  of  data  on  public  health  activities  reported  by  57  state  health  agencies  and 
estimated  for  some  3,000  local  health  departments.  See,  e.g..  Public  Health  Foundation, 
1984  Public  Health  Chartbook  (1986). 


1986]  CARE  FOR  MEDICALLY  INDIGENT  881 

particular  emphasis  in  such  programs,  but  they  are  not  the  focus.  More- 
over, this  type  of  pubhc  health  activity  tends  to  be  quite  restricted,  both 
in  the  scope  of  the  care  provided  and  in  the  level  of  financing  made 
available. ^^^  Consequently,  this  Article  also  skips  over  programs  such  as 
these  to  consider  in  depth  only  direct  efforts  to  curb  medical  indigency. 

1.  Sources  of  State  Power  to  Provide  Indigent  Health  Care.^^^ — All 
but  three  states  either  authorize  or  require  state  or  county  governments 
to  provide  for  * 'relief  and  support"  of  the  poor.'^^  Many  of  these  laws 
date  from  19th  century  *'poor  laws."^^^  The  older  statutes  do  not  always 
expressly  mention  medical  care,  but  several  have  been  interpreted  to 
cover  at  least  some  level  of  medical  services. '^^  State  authority  to  provide 
or  finance  health  care  is  derived  from  the  general  police  power. ^"^^  Counties 
(or  other  substate  jurisdictions)  have  such  power  by  virtue  of  delegation 
from  their  states. ^"^^ 

2.  Types  of  Local  Indigent  Health  Programs. — Existing  indigent 
care  programs  can  be  divided  into  four  different  types:  The  first  is  the 
public  hospital  model,  most  typically  run  by  counties  or  cities,  sometimes 
with  state  aid.  States  using  this  approach  operate  hospitals  themselves 
or  authorize  counties  to  do  so.  These  public  hospitals  are  generally 
required  to  serve  the  poor  free  or  at  a  discount. ^"^^  In  1984,  there  were 

'"In  fiscal  year  1984,  for  example,  state  and  local  public  health  spending  totaled 
some  $6.5  billion.  Public  Health  Foundation,  supra  note  134,  Fig.  1.  A  few  state  health 
agencies  administer  Medicaid  in  their  states,  but  the  latter  expenditures  are  not  included. 
By  way  of  comparison,  federal-state  expenditures  for  Medicaid  in  1984  totalled  $34.5 
billion  (provider  payments  only).  J.  Holahan  &  J.  Cohen,  supra  note  18,  at  9. 

'^*The  following  discussion  owes  much  to  three  legal  and  programmatic  compilations 
of  information  on  assistance  for  the  medically  indigent.  Butler,  Legal  Obligations  of  State 
and  Local  Government  for  Indigent  Health  Care,  in  Academy  for  State  and  Local 
Government,  Access  to  Care  for  the  Medically  Indigent:  A  Resource  Document 
FOR  State  and  Local  Officlals  13-44  (R.  Curtis  &  S.  White  eds.  1985)  [hereinafter  Aca- 
demy] provides  the  most  readable  review.  State  and  Local  Government  Responsibilities, 
supra  note  93,  thoroughly  documents  existing  programs  from  the  perspective  of  legal  enforce- 
ment; it  gives  numerous  state-by-state  listings,  extracts  and  commentaries.  Inter- 
governmental Health  Policy  Project,  George  Washington  Univ.,  State  Programs  of 
Assistance  for  the  Medically  Indigent  (1985)  [hereinafter  IHPP]  also  gives  state-by-state 
profiles  from  the  program  point  of  view,  as  well  as  some  fiscal  data.  This  Article  would 
not  have  been  possible  without  the  kind  of  background  provided  by  such  data  sources. 

'"Kentucky,  North  Carolina,  and  Tennessee  have  no  unit  of  government  legally 
responsible  for  indigent  health  care.  Butler,  supra  note  136  at  17,  Table  I. 

•38New  Hampshire's  General  Assistance  program,  for  example,  originated  from  English 
Poor  Laws.  Baker-Chaput  v.  Cammett,  406  F.  Supp.  1134,  1137  (D.N.H.  1976).  See  also 
R.  Stevens  &  R.  Stevens,  Welfare  Medicine  in  America  (1974). 

''^E.g.,  Jerauld  County  v.  St.  Paul-Mercury  Indem.  Co.,  76  S.D.  1,  71  N.W.2d  571 
(1955);  see,  e.g.,  Butler,  supra  note  136,  at  16. 

'""Jacobson  v.  Massachusetts,  197  U.S.  11  (1905);  Industrial  Comm'n  v.  Navajo 
County,  64  Ariz.  172,  167  P.2d  113  (1946);  Jerauld  County,  76  S.D.  1,  71  N.W.2d  571. 

^*^Jacobson  197  U.S.  11;  F.  Grad,  supra  note  134. 

'"^States  that  have  used  this  method  include  Arkansas,  Colorado,  Florida,  Iowa, 
Maine,  Michigan,  Missouri,  Nevada,  North  Carolina,  South  Carolina,  West  Virginia,  and 
Wisconsin.  Butler,  supra  note  136,  at  19  n. 25. 


882  INDIANA  LAW  REVIEW  [Vol.  19:857 

some  1,622  state  and  local  government  hospitals,  of  a  national  total  of 
5,759  community  hospitals. ^"^^  These  hospitals  are  important  not  merely 
for  inpatient  care  but  also  for  outpatient  care  in  emergency  rooms  and 
outpatient  clinics,  especially  in  the  nation's  large  urban  areas. 

A  second  approach  is  for  government  to  contract  for  indigent  care 
with  specific  private  providers,  mainly  hospitals  and  community  health 
centers  but  occasionally  individual  practitioners  as  well.  Several  levels 
of  government  may  share  financing. '"^  Contracting  is  common  for  pubUc 
health  and  mental  health  services  and  is  sometimes  used  for  general 
health  care  to  the  indigent. ^"^^  States  that  have  used  this  approach  include 
Colorado,  Delaware,  Florida,  Idaho,  and  Indiana. 

The  third  and  fourth  methods  are  both  more  insurance-style  medical 
programs,  under  which  eligible  indigent  enrollees  can  get  specified  services 
from  many  providers,  not  merely  one  or  a  few  contracting  providers. 
Model  number  three  is  a  rather  limited  "vendor-payment"  program 
under  which  eligibles  do  not  enroll  in  advance.  Medical  providers  bill 
the  county  or  state  for  care  to  the  indigent  and  are  reimbursed  at  some 
rate  on  a  case-by-case  basis. '"'^  The  benefits  available  and  the  indigency 
standards  for  such  programs  vary  greatly  from  place  to  place.  Often, 
only  hospital  care  is  covered. 

Model  four  is  the  more  familiar  style  of  insurance  program  that 
resembles  Medicaid  or  private  insurance:  Once  eHgible  persons  enroll, 
they  may  seek  any  covered  service  (typically  well  beyond  hospital  care) 
from  any  participating  provider.  A  few  states  provide  full  Medicaid 
benefits  to  the  medically  indigent,  wholly  at  their  own  expense,  without 
federal  matching  support. ^"^"^  More  commonly,  these  insurance-style  pro- 
grams for  indigent  care  are  far  more  restricted  than  Medicaid,  both  in 


'"♦^Am.  Hosp.  Ass'n,  Hospital  Statistics  7,  Table  1  (1985)  (data  from  1984  survey). 
An  additional  700-odd  institutions  were  federal  or  long-term  hospitals.  Although  state  and 
local  hospitals  thus  constituted  28%  of  the  total,  they  contributed  a  smaller  share  of  total 
hospital  beds,  some  2097o  in  1984.  On  public  hospitals'  contributions  to  indigent  care,  see 
e.g.,  Dallek,  The  Continuing  Plight  of  Public  Hospitals,  16  Clearinghouse  Rev.  97  (1982); 
Feder,  Hadley  &  Mulliner,  Poor  People  and  Poor  Hospitals,  9  J.  Health  Pol.  Pol'y  & 
L.  237  (1984). 

"^Community  health  centers  often  receive  a  mix  of  federal  block  grant,  state,  and 
local  funding  to  supplement  earnings  from  charges  to  patients  and  their  insurers,  if  any. 
See,  e.g.,  G.  Peterson,  supra  note  63;  R.  Price,  Health  Block  Grants  (1981). 

'"'On  pubhc  health  contracting,  see,  e.g.,  Jain,  supra  note  134.  Iowa  contracts  with 
the  University  of  Iowa  Hospitals  and  Clinics  to  provide  non-Medicaid  indigent  health  care 
statewide.  IHPP,  supra  note  136,  at  139.  For  a  list  of  citations  to  states  using  this 
approach,  see  Butler,  supra  note  136,  at  20  nn. 28-30. 

^'^^See  Butler,  supra  note  136,  at  28-30;  State  and  Local  Government  Responsi- 
bilities, supra  note  93. 

"•^Maryland's  indigent  care  program  is  its  Medicaid  program,  for  example.  IHPP, 
supra  note  136,  at  157. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  883 

benefits  and  in  provider  payment  levels. ^"^^  Eligibility  for  these  indigency 
programs  may  be  tied  to  receipt  of  state  "general  assistance*'  (welfare), 
just  as  Medicaid  categorical  eligibility  is  based  on  welfare  (Aid  to  Families 
with  Dependent  Children  or  Supplemental  Security  Income  Assistance). 
This  subtype  of  insurance  program  is  often  called  a  "GA-medical" 
program.''*^  Administrative  and  funding  responsibilities  for  these  insur- 
ance-style programs  are  often  shared  among  state  and  local  authorities. '^^ 

This  brief  discussion  illustrates  how  widely  the  method  of  providing 
indigent  care  and  coverage  varies  nationwide.  In  addition,  the  states 
differ  in  the  amount  of  discretion  they  give  to  the  financing  or  admin- 
istrative agency.  Some  programs  provide  little  administrative  structure 
and  few  operational  guidelines,  whereas  others  are  quite  detailed  and 
specific,  and  their  diversity  is  enormous. '^^ 

From  the  point  of  view  of  the  otherwise  uninsured  medically  indigent, 
what  matters  about  these  state  and  local  efforts  is  how  much  access  to 
care  they  provide.  The  medical  access  that  a  program  achieves  depends 
on  its  legal  requirements,  the  funding  provided,  and  the  administrative 
discretion  given  to  allow  funding  to  be  matched  to  indigents'  require- 
ments. The  administrator's  discretion  may  be  guided  only  by  general 
statutory  principles;  or  specific  statutory  or  administrative  provisions 
may  govern  eligibility,  benefits,  and  level  of  provider  payments. 

3.  Nature  of  State-Local  Duty. — Although  almost  all  states  have 
statutes  permitting  publicly  provided  indigent  health  coverage  or  care,'^^ 
few  seem  to  mandate  such  aid.  It  has  been  argued  that  two  states' 
constitutions  require  those  states  to  provide  for  the  poor,  while  three 
others  require  counties  and  hospital  districts  to  do  so.^"  But  even  these 
apparent  constitutional  mandates  are  open  to  interpretation  about  the 
nature  of  duty  created. ^^'^  In  addition  to  constitutional  provisions,  some 
state  statutes  purport  to  impose  duties  on  the  state,  ^^^  but  these  apparent 
"mandates"  seem  binding  only  so  long  as  the  state  voluntarily  accepts 
that  duty.  The  state  remains  free  to  repeal  a  statute,  even  if  by  its  terms 
it  does  not  seem  to  allow  administrative  or  budgetary  cutbacks.  Thus, 


'"^/c?.  passim. 

^'^^Id.  at  26  (also  called  general  relief,  home  relief,  or  poor  relief). 

'^"Butler,  supra  note  136,  at  19. 

'^'IHPP,  supra  note  136,  at  67-292;  see  also  State  and  Local  Government  Re- 
sponsibilities, supra  note  93. 

•"See,  e.g.,  La.  Rev.  Stat.  Ann.  §  40:2017  (West  1977)  (state  department  of  health 
"may"  provide  for  indigent  care  in  private  hospitals). 

'"Butler,  supra  note  136,  at  16  nn.8,  9  (citing  Ala.  Const,  art.  IV,  §  88,  Kan. 
Const,  art.  7,  §  4,  Mont.  Const,  art.  XII,  §  3(3),  N.Y.  Const,  art.  VIII,  §  1  (states); 
Tex.  Const,  art.  9,  §§  4,5,9.  (counties  or  districts)). 

''■*See,  e.g.,  Mont.  Const,  art.  XII,  §  3  (state  must  estabhsh  institutions  but  only 
such  as  the  public  interest  may  require). 

'"See,  e.g.,  Del.  Code  Ann.  tit.  31,  §  505(6)  (1985)  (general  assistance  program). 


884  INDIANA  LAW  REVIEW  [Vol.  19:857 

it  seems  fair  to  conclude  that  there  is  no  fundamental  state  right  to 
health  care;  some  courts  have  so  held.^^^ 

On  the  other  hand,  state  statutory  mandates  on  lesser  jurisdictions 
can  be  truly  binding.'"  Some  state  courts  have  interpreted  even  ostensibly 
permissive  statutes  to  mandate  local  government  to  fund  care  for  the 
indigent.  The  Arizona  Supreme  Court,  for  example,  read  two  statutes 
authorizing  counties  to  care  for  the  sick  as  imposing  a  duty  to  provide 
medical  care  for  the  indigent  sick.'^^  The  obligation  to  provide  some 
variety  of  indigent  medical  care  may  even  appear  in  a  city  charter'^^ 
and  may  apply  even  though  an  area  is  otherwise  granted  "home  rule."'^° 
In  some  thirty-seven  states,  counties  or  towns  are  to  some  degree  re- 
sponsible for  indigent  care  (often  shared  among  levels  of  government); 
in  four  other  states,  counties  are  responsible  for  care  only  if  they  operate 
county  hospitals.'^' 

Public  hospitals  are  generally  required  to  serve  the  poor  at  a  discount 
or  at  no  charge.  An  interesting  issue  arises  where  administration  of  the 
public  hospital  is  contracted  out  to  a  private  firm  (as  increasingly  occurs 
for  cost  containment  reasons)  or  where  the  entire  hospital  is  sold  to 
private  interests.  Of  course,  the  private  administrators  or  new  owners 
may  be  obligated  by  contract  to  provide  some  level  of  indigent  care. 
North  Carolina  has  gone  even  further,  enacting  a  provision  requiring 
both  purchasers  and  lessees  of  public  hospitals  to  continue  indigent 
care.'^^  In  any  event,  enforcement  of  any  such  obligation  may  pose  a 
problem.'" 

4.  Extent  of  State-Local  Duty. — Exactly  what  limits  exist  or  may 
be  set  on  any  public  duty  or  undertaking  to  provide  or  finance  care  is 
not  settled  by  current  case  law.'^"*  If  a  provision  is  not  mandatory,  the 
government  can  revoke  it  by  ceasing  to  provide  or  to  finance  care. 


^^^See,  e.g.,  Mary  Lanning  Memorial  Hosp.  v.  Clay  County,  170  Neb.  61,  101  N.W.2d 
510  (1960). 

'''See.  e.g.,  Ind.  Code  §§  12-2-1-1  through  -39  (1982  &  Supp.  1986)  ("Township  trustee 
must  promptly  provide  medical  and  surgical  attendance  for  all  the  poor  .  .  ,  not  ...  in 
public  institutions."). 

'=«Industrial  Comm'n  v.  Navajo  County,  64  Ariz.  172,  167  P. 2d  113  (1946);  see  also 
Memorial  Hosp.  v.  Maricopa  County,  415  U.S.  250,  252  (1974)  (notes  "mandatory"  duty 
of  counties). 

^'^See,  e.g.,  F.  Grad,  supra  note  134. 

'"^See,  e.g.,  Ill  Ann.  Stat.  ch.  34,  para.  5011-5029  (Supp.  1986)  (Cook  County  is 
obligated  to  finance  care  for  poor). 

'^'Calculated  from  Butler,  supra  note  136,  at  17,  Table  I.  See  also  State  and  Local 
Government  Responsibilities,  supra  note  93. 

'"N.C.  Gen.  Stat.  §  131E-13  (Supp.   1985). 

'"Andrulis,  Survival  Strategies  for  Public  Hospitals,  Bus.  &  Health,  June  1986,  at 
31,  34. 

'^^Interestingly,  most  cases  are  brought  not  by  the  poor  themselves  but  by  hospitals 
that  have  provided  care  to  indigents  and  are  requesting  compensation  for  that  care. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  885 

Courts  generally  will  not  obligate  a  government  to  undertake  a  function 
that  is  permissive  rather  than  mandatory. '^^ 

Occasionally,  a  state  or  county  may  operate  an  indigent  health  care 
program  simply  by  appropriating  funds  without  a  statutory  mandate  or 
even  express  statutory  authority.  When  such  appropriated  funds  are 
exhausted,  the  state  or  local  agency  would  seem  to  have  no  lingering 
obHgation  to  continue  covering  care  for  the  indigent. '^^ 

Where  specific  statutory  language  governs  indigent  care,  budgetary 
discretion  may  be  more  circumscribed.  Programs  vary  widely  in  the 
discretion  granted  to  control  the  scope  of  support  through  ehgibility, 
benefits,  and  payment  provisions.  For  example,  Iowa  gives  its  county 
boards  of  social  services  broad  control  over  the  form  and  amount  of 
support. ^^^  CaUfornia  also  gives  broad  discretion  to  its  county  supervisors 
to  determine  eligibility  for,  amount  of,  and  conditions  attached  to  indigent 
rehef.'^^  However,  a  county's  exercise  of  discretion  must  remain  consistent 
with  the  language  and  purpose  of  California's  General  Assistance  statutes. '^^ 
Other  states  have  given  local  authorities  much  less  discretion.  For  ex- 
ample, Michigan's  GA-medical  program  sets  very  precise  standards  and 
fixes  the  local  share  of  resultant  spending. '^°  Even  when  counties  are 
given  broad  administrative  discretion,  state  courts  have  held  that  county 
regulations  must  bear  a  reasonable  relationship  to  the  intended  purpose 
of  the  state  statute. 

A  county's  obligation  to  deliver  indigent  health  care  does  not  nec- 
essarily change  if  the  state  establishes  an  additional  program,  such  as 
Medicaid. '^^  Similarly,  establishing  a  public  medical  facility  within  the 
county  does  not  necessarily  relieve  the  county's  responsibility  for  indigent 
care  rendered  elsewhere.  The  Nevada  Supreme  Court,  for  example,  held 
a  county  responsible  for  emergency  care  rendered  at  a  private  hospital 
even  though  the  county  operated  its  own  facility. ^^^  In  contrast,  California 
courts  have  held  that  counties  were  responsible  only  for  care  given  at 


'"See,  e.g.,  Perth  Amboy  Gen.  Hosp.  v.  Board  of  Chosen  Freeholders,  158  N.J. 
Super.  556,  386  A. 2d  900  (1978)  (statute  which  authorized  counties  to  make  payments  to 
hospitals  providing  care  to  indigents  did  not  require  counties  to  do  so). 

^^See  generally  Butler,  supra  note  136,  at  18. 

'^^Collins  V.  Hoke,  705  F.2d  959  (8th  Cir.   1983). 

'^«City  &  County  of  San  Francisco  v.  Superior  Court,  57  Cal.  App.  3d  44,  47,  128 
Cal.  Rptr.  712,  714  (1976). 

'*'Bay  Gen.  Community  Hosp.  v.  County  of  San  Diego,  156  Cal.  App.  3d  944,  203 
Cal.  Rptr.  184  (1984);  Patten  v.  San  Diego  County,  106  Cal.  App.  2d  467,  235  P.2d  217 
(1951). 

''"Mich.  Comp.  Laws  Ann.  §  400.66a  (West  1976);  see  IHPP,  supra  note  136,  at 
171-74. 

'^'Madera  Community  Hosp.  v.  County  of  Madera,  155  Cal.  App.  3d  136,  201  Cal. 
Rptr.  768  (1984);  Hall  v.  County  of  Hillsborough,  122  N.H.  448,  445  A.2d  1125  (1982). 

'^^Washoe  County  v.  Wittenberg,   100  Nev.  143,  676  P.2d  808  (1984). 


886  INDIANA  LAW  REVIEW  [Vol.  19:857 

a  county   facility  or  by  a  provider   already  under  contract  with  the 
county.'"'^ 

5.  Funding  Limitations  and  Obligations. — The  state  of  Washington 
statutorily  limits  public  obligations  to  the  appropriated  amounts/^"^  whereas 
Ohio  positively  obligates  the  county  to  appropriate  needed  funds. ^^^  Some 
states  have  given  counties  specific  authority  to  levy  taxes  in  order  to 
care  for  the  indigent.  Idaho,  for  example,  allows  counties  to  levy  an 
ad  valorem  tax  on  property. '^^  Nevada  allows  indigent  health  spending 
to  raise  county  property  taxes  above  an  otherwise  binding  ceiling  per- 
centage on  assessments. ^^^  A  public  hospital  or  cHnic  or  a  private  con- 
tractor may  simply  reach  the  limit  of  its  resources  and  then  shut  down 
certain  services  or  turn  away  certain  people  (or  postpone  serving  them). 
Presumably,  in  so  doing,  it  would  use  accepted  principles  of  medical 
triage,  serving  the  medically  neediest  first.  Whether  a  disappointed  patient 
or  the  provider  can  then  sue  the  responsible  jurisdiction(s)  for  more 
than  the  budgeted  funds  is  not  clear. ^^^  Presumably,  a  great  deal  would 
turn  on  the  precise  statutory  wording  of  the  institution's  duty  and  the 
extent  of  discretion  authorized. 

6.  Specific  Terms  of  Assistance. — Any  program  of  medical  assist- 
ance requires  some  operating  definitions  as  to  (a)  eligible  recipients,  (b) 
benefits  available  (including  which  providers  and  what  services  are  cov- 
ered), and  (c)  payment  levels.  As  for  other  aspects  of  program  admin- 
istration, local  administrators  generally  are  given  broad  discretion,  although 
courts  have  sometimes  hmited  the  exercise  of  this  discretion. '"^^  For 
example,  a  New  Jersey  court  held  that  a  municipality  must  conform  to 
statewide  rules  and  regulations  of  public  assistance.  *^^  In  a  case  from 


'''Bay  Gen.  Community  Hosp.,  156  Cal.  App.  3d  944,  203  Cal.  Rptr.  184;  Union 
of  Am.  Physicians  &  Dentists  v.  County  of  Santa  Clara,  149  Cal.  App.  3d  45,  196  Cal. 
Rptr.  602  (1983). 

'^^Wash.  Rev.  Code  Ann.  §  74.09.035  (Supp.  1987);  see  also  Ga.  Code  Ann.  §  31- 
8-36(b)  (1985). 

'"St.  Thomas  Hosp.  v.  Schmidt,  62  Ohio  St.  2d  439,  406  N.E.2d  819  (1980);  Ohio 
Rev.  Code  Ann.  §  5101.161  (Anderson  Supp.   1985). 

'^^IDAHO  Code  §  31-3503  (1983);  see  also  Idaho  Falls  Consol.  Hosp.  Inc.  v.  Bingham 
County  Bd.  of  County  Comm'rs,  102  Idaho  838,  642  P.2d  553  (Idaho  1982). 

'^^Nev.  Rev.  Stat.  §  428.050  (1985). 

''«Some  courts  have  held  that  counties  may  not  be  liable  for  indigent  health  care 
beyond  their  budgets.  See,  e.g..  Board  of  Directors  of  Memorial  Gen.  Hosp.  v.  County 
Indigent  Hosp.  Claims  Bd.,  77  N.M.  475,  423  P.2d  994  (N.M.  1967);  Board  of  Comm'rs 
V.  Ming,  195  Okla.  234,  156  P.2d  820  (1945);  Cache  Valley  Gen.  Hosp.  v.  Cache  County, 
92  Utah  279,  67  P. 2d  639  (1937).  Other  courts  have  held  that  obligations  must  be  met 
even  if  they  exceed  the  county's  budget  hmitations.  City  &  County  of  San  Francisco  v. 
Superior  Court,  57  Cal.  App.  3d  44,  128  Cal.  Rptr.  712  (1976);  Hall  v.  County  of 
Hillsborough,   122  N.H.  448,  445  A.2d  1125  (1982). 

""^See  supra  text  accompanying  notes  167-70. 

•«°Ricker  v.  Lawson,  155  N.J.  Super.  536,  382  A.2d  1183  (1977). 


1986]  CARE  FOR  MEDICALLY  INDIGENT  887 

New  Hampshire,  a  United  States  district  court  held  that  a  town  must 
administer  its  assistance  program  pursuant  to  written,  objective,  and 
ascertainable  standards. ^^^ 

To  determine  eligibility,  administrators  of  indigent  health  care  must 
define  "indigent."  The  majority  of  states  do  not  provide  a  definition 
within  the  statute  itself,  although  some  statutes  include  a  very  general 
definition.  For  example.  New  Hampshire  defines  those  who  are  entitled 
to  free  health  care  as  those  who  are  "poor"  and  unable  to  support 
themselves. ^^^  Idaho  defines  the  medically  indigent  as  "persons  needing 
hospital  care  without  income  or  resources  sufficient  to  pay  for  necessary 
medical  care."'^^  Some  states  have  included  within  their  statutes  more 
precise  definitions  of  "indigent."  Arizona,  for  example,  estabUshes  spe- 
cific income  and  resource  standards. '^"^  Oklahoma  defines  an  indigent  as 
a  person  with  income  under  the  federal  poverty  level,  with  resources 
insufficient  for  self  care,  and  with  a  need  for  hospital  care.'^^ 

Where  statutes  have  provided  no  definition  of  indigency  or  only  a 
general  definition,  state  courts  have  often  played  an  active  role  in 
interpreting  the  statute.  The  Supreme  Court  of  Montana,  for  example, 
held  that  the  counties  must  have  flexible  eligibility  standards  that  take 
into  consideration  not  only  income  but  also  family  debts  and  outstanding 
medical  bills. ^^^ 

In  defining  indigency,  most  state  statutes  contain  residency  or  cit- 
izenship requirements.  However,  in  1974,  the  United  States  Supreme 
Court  held  that  an  Arizona  statute  requiring  a  year's  residence  in  a 
county  as  a  condition  of  indigent  care  was  unconstitutional  under  the 
equal  protection  clause. '^^  Since  this  ruHng,  several  state  courts  have 
invalidated  other  similar  durational  residency  requirements.  More  recent 
statutes  simply  require  the  indigent  to  be  domiciled  in  the  state  with  an 
intent  to  reside  there. '^^  This  type  of  residency  requirement  would  seem 
to  answer  the  equal  protection  concerns  stated  by  the  Supreme  Court. '^^ 


'^■Baker-Chaput  v.  Cammet,  406  F.  Supp.   1134  (D.N.H.   1976). 

'«2N.H.  Rev.  Stat.  Ann.  §  165:1  (Supp.   1986). 

'^^IDAHO  Code  §  31-3503  (1983). 

'«^Ariz.  Rev.  Stat.  Ann.  §  36-2905  (Supp.   1986). 

•«'Okla.  Stat.  Ann.  tit.  56,  §  58  (West  Supp.   1987). 

'«^Saint  Patrick  Hosp.  v.  Powell  County,  156  Mont.  153,  477  P. 2d  340  (1970);  see 
also  Hall  v.  County  of  HUlsborough,  122  N.H.  448,  445  A.2d  1125  (1982);  Sioux  Valley 
Hosp.  Ass'n  V.  Davison  County,  319  N.V^.2d  490  (S.D.   1982). 

'^^Memorial  Hosp.  v.  Maricopa  County,  415  U.S.  250  (1974). 

'^^See,  e.g.,  Mont.  Code  Ann.  §  53-3-315  (1985). 

'^^In  1982,  the  United  States  Supreme  Court  held  unconstitutional  a  Texas  statute 
which  prohibited  illegal  aliens  from  enrolling  in  public  schools.  Plyler  v.  Doe,  457  U.S. 
202  (1982).  This  case  would  seem  to  indicate  that  states  could  not  deny  indigent  health 
care  to  undocumented  aliens.  However,  language  in  the  opinion  can  be  interpreted  as 
limiting  the  holding  to  educational  rights  of  minor  children. 


888  INDIANA  LA  W  REVIEW  [Vol.  19:857 

States  have  differed  in  their  treatment  of  undocumented  aliens.  The  New 
Mexico  Supreme  Court  held  undocumented  aliens  were  "residents"  for 
purposes  of  the  indigent  care  statute. '^°  However,  a  California  court 
recently  held  that  counties  were  not  required  to  reimburse  private  hospitals 
for  care  of  undocumented  aliens  because  the  statute  required  indigents 
to  be  "lawful"  residents. ^^^ 

Most  state  statutes  do  not  specify  which  providers  or  what  services 
are  covered  under  their  indigent  health  care  laws.^^^  Thus,  the  counties 
often  have  considerable  discretion  in  determining  the  type  of  care  covered 
and  who  may  be  paid  as  providers.  Although  state  courts  generally  have 
upheld  this  broad  discretion,  California  courts  have  held  that  a  county 
has  no  obligation  to  pay  for  indigent  care  delivered  at  a  facility  other 
than  its  own  or  one  with  which  it  has  contracted.  ^^^  In  contrast,  the 
Idaho  Supreme  Court  required  an  Idaho  county  to  pay  a  hospital  that 
was  neither  under  contract  nor  even  within  the  state. ^^"^  (The  case  involved 
an  Idaho  resident's  going  to  nearby  Salt  Lake  City,  a  logical  and  common 
pattern;  query  whether  more  distant  hospitals  would  be  paid.)  Even  those 
states  that  require  a  contractual  relationship  with  the  provider  often 
allow  recovery  by  noncontractors  in  emergency  situations. ^^^ 

The  particular  services  covered  by  indigent  health  care  programs  also 
vary  widely  from  state  to  state. '^^  Most  state  indigent  statutes  cover  at 
least  emergency  care.  Some  states  cover  a  broader  range  of  health  care 
needs.  Arizona,  for  example,  provides  for  hospitalization  and  medical 
care,  including  long-term  care  and  home  health  services. ^^^ 

Judicial  interpretations  of  coverage  provisions  have  been  important. 
The  Indiana  courts,  for  example,  have  construed  an  Indiana  provision 
that  covers  indigents  suffering  from  a  "disease,  defect,  or  deformity" 
to  exclude  normal  pregnancy. '^^  In  a  later  case  interpreting  the  same 


'^Perez  v.  Health  &  Social  Servs.,  91  N.M.  334,  573  P.2d  689  (1977). 

'^'Bay  Gen.  Community  Hosp.  v.  County  of  San  Diego,  156  Cal.  App.  3d  944,  203 
Cal.  Rptr.  184  (1984). 

'^^See,  e.g.,  Cal.  Welf.  &  Inst.  Code  §  17000  (West  1980);  Cal.  Gov't  Code 
§  29606  (West  1968).  California's  statute  directs  counties  to  "relieve  and  support"  the 
incompetent,  poor  and  indigent,  and  "necessary  expenses"  incurred  in  this  support  are 
charged  to  the  county.  See  also  Neb.  Rev.  Stat.  §  68-104  (1984).  Nebraska's  statute 
directs  counties  to  provide  "medical  and  hospital  care"  to  "the  poor". 

'""'E.g.,  Bay  Gen.  Community  Hosp.   156  Cal.  App.  3d  944,  203  Cal  Rptr.   184. 

'^"University  of  Utah  Hosp.  &  Medical  Center  v.  Bethke,  101  Idaho  245,  611  P. 2d 
1030  (1980). 

'^^County  Dep't  of  Public  Welfare  v.  Trustees  of  Indiana  Univ.,  145  Ind.  App.  392, 
251  N.E.2d  456  (1969);  Washoe  County  v.  Wittenberg,  100  Nev.  143,  676  P.2d  808  (1984). 

'^See  generally  IHPP,  supra  note  136,  at  67-292  (state-by-state  profiles). 

"^Ariz.  Rev.  Stat.  Ann.  §  11-291  (Supp.  1986). 

'9»Lutheran  Hosp.  of  Fort  Wayne,  Inc.  v.  Department  of  Public  Welfare,  397  N.E.2d 
638  (Ind.  Ct.  App.   1979)  (construing  Ind.  Code  §  12-5-1-1  (1982)). 


1986]  CARE  FOR  MEDICALLY  INDIGENT  889 

Statute,  an  Indiana  court  held  that  a  county  may  not  restrict  the  number 
of  inpatient  days.^^^ 

Few  indigent  care  programs  set  the  type  of  particularized  limits  or 
conditions  on  services  that  have  become  common  in  conventional  private 
group  health  insurance  and  in  Medicaid,  such  as  pre-admission  screening 
for  nonemergency  hospital  admissions. ^^  Indigent  programs  that  are 
integrated  with  Medicaid  present  an  exception. ^^^  Thus,  the  validity  of 
controls  of  this  kind  seems  not  to  have  been  litigated. 

Program  specifications,  or  the  lack  thereof,  also  govern  payment 
levels,  an  important  indirect  influence  on  access  to  care.  Medicaid- 
integrated  programs  generally  pay  Medicaid  rates,  and  contractual  prov- 
iders receive  the  contracted-for  amounts.  Many  older-style  indigent  ven- 
dor-payment programs,  however,  pay  hospitals  flat,  per-day  amounts. ^°^ 
Two  older  state  statutes  oddly  prohibit  price  setting  through  bids^^^ — 
quite  contrary  to  recent  innovations  in  practice,  notably  in  Arizona  and 
California. ^^"^  One  early  Nebraska  case  disqualified  counties'  prepayment 
for  services  as  * 'insurance,  "^°^  but  this  holding  seems  obsolete  in  light 
of  recent  trends  toward  prepayment  in  Medicare  and  Medicaid. 

Most  states  or  counties  have  established  varied  procedural  require- 
ments that  providers  or  patients  must  follow  to  receive  payment  for 
indigent  health  care.  Many  states  require  prior  governmental  approval 
or  a  contractual  agreement  before  a  provider  renders  care  to  an  indigent. 
However,  this  requirement  may  be  waived  in  emergency  situations. ^°^ 


'^Welborn  Memorial  Baptist  Hosp.,  Inc.  v.  County  Dep't  of  Public  Welfare,  442 
N,E.2d  372  (Ind.  Ct.  App.  1982). 

^^See,  e.g.,  J.  Califano,  supra  note  22;  P.  Fox,  W.  Goldbeck  &  J.  Spies,  supra 
note  22;  J.  Holahan  &  J.  Cohen,  supra  note  18. 

^"'Maryland,  for  example,  simply  includes  indigents  not  eligible  for  federal  Medicaid 
assistance  within  the  same  state-federal  Medicaid  program,  but  wholly  at  state  expense. 
See  IHPP,  supra  note  136,  at  157-59. 

^^See,  e.g.,  Massachusetts  Gen.  Hosp.  v.  Cambridge,  347  Mass.  519,  198  N.E.2d 
889  (1964)  (hospital  rate  for  voluntarily  treated  indigents  is  purely  statutory  and  can  be 
below  actual  incurred  expenses);  Del.  Code  Ann.  tit.  29,  §  7204  (1983);  see  also  Springfield 
Hosp.  V.  Comm'r  of  Public  Welfare,  350  Mass.  704,  216  N.E.2d  440  (1966)  (hospital  rate 
for  old  age  assistance  patient  below  actual  cost  is  valid;  hospitals  are  "greatly  affected  with 
the  public  interest"  and  have  a  "civic  obligation"  to  serve  patients), 

^^CoNN.  Gen.  Stat.  Ann.  §  17-274  (West  Supp.  1986);  Utah  Code  Ann.  §  17-5- 
55  (Supp.   1986). 

^See,  e.g.,  J.  Christianson  &  D.  Hillman,  Health  Care  for  the  Indigent  and 
Competitive  Contracts:  The  Arizona  Experience  (1986);  L.  Johns,  R.  Serzan  &  M. 
Anderson,  Selective  Contracting  for  Health  Services  in  Californla,  Final  Report 
(1985). 

^^Hustead  v.  Richardson  County,  104  Neb.  27,  175  N.W.  648  (1949)  (counties  not 
authorized  to  engage  in  business  of  insurance). 

2o*University  of  Utah  Hosp.  &  Medical  Center  v.  Bethke,  101  Idaho  245,  611  P.2d 
1030  (1980). 


890  INDIANA  LAW  REVIEW  [Vol.  19:857 

D.  Obligations  of  Private  Health  Insurers 

Would-be  insureds  have  no  general  legal  right  to  private  health 
coverage,  and  there  is  little  tradition  of  providing  free  or  below-cost 
insurance  as  there  has  long  been  for  providing  hospital  care.  Insurance 
is  a  private  contract,  only  partially  regulated,  available  to  those  who 
can  afford  it  and  not  to  others.  Several  quahfications  to  this  "no  rights" 
generalization  deserve  mention. 

First,  if  workers  or  their  dependents  are  covered  through  a  workplace 
group  and  they  cease  to  be  group  members,  because  of  layoff  or  wid- 
owhood, for  example,  they  are  entitled  to  continue  on  the  group  policy 
at  their  own  expense  for  a  certain  period. ^^"^ 

Second,  in  most  states,  Blue  Cross/Blue  Shield  plans  in  theory  must 
allow  open  enrollment  in  their  nongroup  plans. ^^^  This  is  one  regulatory 
stricture  that  can  be  seen  as  a  pubUc  quid  pro  quo  for  granting  the 
Blues  tax  exemption.  Moreover,  such  nongroup  Blues  rates  may  be  kept 
low  by  direct  or  indirect  subsidy  from  the  Blues'  group  business  if  their 
group  market  share  is  strong  enough  to  permit  this;^°'  they  also  often  use 
a  version  of  "community  rating"  principles.  Community  rating  charges 
all  insureds  in  a  large  pool  the  same  price  (based  on  the  pool's  average 
cost),  rather  than  basing  rates  on  the  specific  experience  of  subgroups. 
PooHng  experience  arguably  helps  the  poorest  and  sickest,  whose  ex- 
perience is  the  worst,  at  the  expense  of  lower-risk  insureds. ^^° 

Finally,  ten  states  now  guarantee  otherwise  uninsurable  people  the 
right  to  conventional  insurance  at  a  subsidized  rate.^'^  Coverage  is  rea- 

^°^This  "continuation"  privilege  (or  the  ability  to  "convert"  to  a  relatively  generous 
individual  policy)  arose  first  through  industry  custom,  then  through  state  and  federal  law. 
On  custom,  see  Health  Ins.  Ass'n  of  Am.,  Group  Health  Insurance  1-17  (1976);  for 
state  rules  as  of  Spring  1985,  see  IHPP,  supra  note  136,  at  294-95;  for  new  federal  rules 
from  COBRA  legislation,  extending  the  right  to  coverage  to  a  period  up  to  three  years 
in  some  cases,  see  Bovbjerg,  supra  note  24,  at  405-06  nn.  12  &  13. 

"^^See,  e.g.,  Ind.  Code  §  27-8-11-3  (Supp.  1986).  It  is  thought  that  in  recent  years, 
the  Blues'  commitment  to  open  enrollment  has  waned  under  competitive  pressure.  Cf. 
U.S.  Gen.  Acct.  Off.,  Pub.  No.  HRD-86-110,  Health  Insurance:  Comparing  Blue  Cross 
AND  Blue  Shield  Plans  with  Commercla.l  Insurers  (July  1986)  (Blues'  differences  from 

commercials  described  as  minor). 

^"'In  Massachusetts,  for  example,  by  order  of  the  Insurance  Commissioner,  one  percent 

of  group  premiums  helps  defray  nongroup  expenses.  Indirect  subsidies  may  be  achieved 

by  regulatory  accounting  rules  that  attribute  the  same  administrative  loading  factor  to 

group  coverage  as  to  nongroup,  when  in  fact  group  practice  could  normally  be  expected 

to  achieve  economies  of  scale  in  sales  and  operations.  Cf.  Bovbjerg,  supra  note  24,  at 

409. 

2'°Under  competition  from  more  experience-rated  policies,  largely  in  the  group  market, 
community  rating  pools  tend  to  fragment,  as  low-risk  groups  insure  on  their  own  rather 
than  remain  in  the  community  pool.  For  a  description  of  how  such  competition  ended 
early  community  rating  in  the  group  market,  see  P.  Starr,  The  Soclal  Transformation 
OF  American  Medicine  329-31  (1982). 

^"In  one  of  the  ten,  Connecticut,  the  pool  is  not  restricted  to  persons  rejected  by 
conventional   insurers.   See  Bovbjerg  &  Koller,   State  Health  Insurance  Pools:   Current 


1986]  CARE  FOR  MEDICALLY  INDIGENT  891 

sonably  generous  by  non-group  standards,  but  enrollments  are  very  low, 
even  as  a  fraction  of  the  tiny  percentage  of  uninsurables.^^^  Even  with 
considerable  subsidy,  policies  cost  150%  or  more  of  the  price  of  standard 
coverage. 

These  various  insurance  rules  all  help  would-be  insureds,  but  do 
require  them  to  pay  for  their  own  coverage,  albeit  at  relatively  favorable 
rates.  Thus,  they  probably  do  not  reach  many  or  most  of  the  medically 
indigent,  who  are  relatively  poor  or  unemployed  or  both.  They  may, 
however,  help  prevent  medical  indigency  among  the  nonpoor  caused  by 
large  medical  bills  that  exceed  ability  to  pay. 

One  common  type  of  state  insurance  regulation  tends  to  make  in- 
surance relatively  less  affordable,  namely  * 'mandatory  benefits"  rules 
that  require  all  health  insurance  policies  to  cover  certain  services,  notably 
mental  health  care.  Mandated  benefits  "upgrade"  insurance  protection 
for  those  who  can  afford  it,  but  disproportionately  burden  poorer  insureds 
and  their  employers  and  tend  to  make  it  more  difficult  for  those  less 
able  to  pay  to  buy  any  coverage  at  all.^'^ 

IV.     Private  and  Public  Approaches  Toward  Improvement 

A.     Introduction:  Where  We  Stand 

The  problems  of  the  uninsured  and  of  the  uncompensated  care  they 
generate  are  increasing.  Legally,  there  is  tenuous  support  for  a  right  to 
care  or  coverage  in  the  constitutional  or  statutory  sense,  as  just  noted. 
Most  of  the  obligations  are  conditional:  that  is,  if  a  provider,  an  insurer, 
or  the  government  assumes  to  provide  care  or  coverage  for  someone, 
then  it  must  provide  care  or  coverage  of  a  certain  standard.  In  any 
event,  this  branch  of  the  law  appears  to  be  poorly  developed  in  terms 
of  the  jurisprudence  of  rights.  Indeed,  for  the  most  part,  cases  on 
indigent  coverage  do  not  even  cite  one  another.  As  a  result,  the  body 
of  case  law  provides  little  guidance. 


Performance,  Future  Prospects,  23  Inquiry  HI  (1986)  (experience  of  six  pools  operating 
before  1984).  The  states  are  Connecticut,  Florida,  Indiana,  Iowa,  Minnesota,  Montana, 
Nebraska,  Ohio,  Rhode  Island,  Tennessee,  and  Wisconsin.  As  of  late  1986,  ten  states 
now  have  risk  pool  legislation,  according  to  the  National  Governors'  Association.  G. 
Claxton,  Concept  Paper:  Facilitating  Health  Care  Coverage  for  the  Working 
Uninsured  14  (Nat'l  Governor's  Ass'n,  Pre-Conference  Draft,  Dec.  1986). 

^'^Bovbjerg  &  Koller,  supra  note  211.  About  one  percent  of  the  population  is  thought 
to  be  uninsurable.  Id.  See  also  supra  note  26  and  accompanying  text. 

^^^See  Demkovich,  supra  note  50.  Such  rules  disproportionately  burden  small  group 
and  nongroup  coverage  because  large  workplace  groups  very  often  "self-insure"  precisely 
so  as  to  escape  such  state  insurance  mandates  and  achieve  other  economies.  See  Bovbjerg, 
supra  note  24,  at  408.  Over  half  of  large  employment  groups  are  now  thought  to  self- 
insure.  See  infra  note  273. 


892  INDIANA  LAW  REVIEW  [Vol.  19:857 

Any  effective  solution  will  require  at  least  some  government  in- 
volvement, although  the  nature  of  that  involvement  may  vary  considerably 
according  to  circumstances.  Past  political  responses  to  the  problems  of 
the  poor  have  varied  enormously,  and  there  is  considerable  disagreement 
about  the  approach  that  should  be  taken. 

B.     Private  Sector  Approaches 

"Leave  it  to  the  private  sector"  is  the  understandable  response  of 
many  people  to  medical  indigency.  After  all,  most  of  the  progress  in 
past  generations  was  due  to  the  astonishing  success  of  private  group 
health  coverage.  It  is  largely  responsible  for  bringing  health  coverage  to 
approximately  ninety  percent  of  American  workers  and  their  depend- 
ents. ^'"^  Moreover,  "mainstream"  employment  group  coverage  prepays 
for  most  typical  medical  and  dental  services  from  almost  any  licensed 
provider  at  little  out-of-pocket  cost  to  the  insured — thus  guaranteeing 
access  to  care  while  also  protecting  against  poverty-inducing  catastro- 
phe.2^^ 

The  spread  of  workplace  group  insurance,  however,  seems  to  be 
reaching  its  natural  limit. ^'^  Under  current  economic  conditions,  it  ap- 
pears that  a  relatively  high  level  of  "structural  uninsurance"  will  remain. 
Of  course,  this  level  will  vary  from  place  to  place  depending  upon 
economic  conditions,  the  employment  structure  of  the  economy,  existing 
tax  incentives,  and  so  on. 

Relying  on  private  efforts  to  increase  insurance  can  only  partly 
address  the  problem  of  medical  indigency.  Private  coverage  can  reach 
only  those  with  the  wherewithal  to  pay  for  coverage.  It  thus  bypasses 
the  indigent,  although  more  coverage  would  tend  to  prevent  the  type 
of  medical-financial  catastrophe  that  can  cause  people  to  become  med- 
ically indigent. 

Most  employed  people  who  do  not  have  "proper"  coverage  and 
who  might  expect  to  benefit  from  private  solutions  are  in  small  em- 
ployment groups.  Of  employees  in  larger  groups  (100  or  more  employees), 
nearly  100%  have  coverage,  whereas  fewer  than  half  of  the  people  in 
smaller  employment  groups  have  health  coverage. ^'^  The  plain  fact  is 
that  existing  forms  of  coverage  sold  through  existing  organizational 
arrangements  simply  cost  more  than  many  of  these  workers  and  their 


^'"See,  e.g.,  Moyer  &  Cahill,  supra  note  24;  see  also  supra  notes  12-15  and  accompany- 
ing text. 

^' ^Medicare  and  Medicaid  are  similar  to  private  coverage  in  this  regard;  they  have 
essentially  adopted  the  workplace  model  of  middle  class  style  coverage  for  their  particular 
populations. 

^'*See  supra  text  accompanying  notes  46-52. 

^''See,  e.g.,  Moyer  &  Cahill,  supra  note  24.  The  problem  is  thought  to  be  still  worse 
for  very  small  groups,  those  with  twenty,  ten,  or  fewer  employees. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  893 

employers  are  willing  to  pay.  For  smaller,  poorer  workplaces  and  for 
individuals,  covering  the  same  medical  expenses  costs  more  per  capita 
in  absolute  terms,  costs  much  more  as  a  relative  share  of  earnings,  and 
receives  considerably  less  government  "subsidy"  in  forgone  taxes. ^^^ 

For  large  groups,  medical  experience  is  more  predictable  (and  hence 
more  insurable),  and  economies  of  scale  make  coverage  cheaper  to  sell 
and  to  administer.  Relative  costs  of  sales,  administration,  claims  settle- 
ment, and  regulation  all  rise  as  group  size  declines;  and  many  of  the 
economizing  methods  of  large  groups  are  not  available  to  smaller  ones, 
at  least  not  to  the  same  degree — including,  for  instance,  self-insurance, 
sophisticated  protocols  for  screening  and  reviewing  care,  and  negotiating 
favorable  rates  with  medical  providers.  Smaller  groups  can  combine  into 
larger  ones,  but  artificially  created  large  groups  do  not  act  like  naturally 
existing  groups. ^^^  Finally,  the  tax-free  status  of  workplace  health  benefits 
provides  a  greater  benefit  to  higher  income  workers  than  to  poorer  ones 
because  income  taxes  are  progressive.  Those  working  poor  most  in  need 
of  assistance  pay  no  income  tax  at  all  but  likewise  receive  no  tax  benefit 
from  buying  medical  care  through  workplace  coverage,  unlike  their  middle 
class  counterparts. 

Some  private  initiatives  offer  opportunity  for  improvement,  notably 
in  underwriting  and  pooling  smaller  groups  and  in  developing  attractive 
plans  with  better  cost-containment  features. ^^°  Attitudes  about  the  im- 
portance of  insurance  may  also  change.  However,  substantial  changes 
in  the  extent  of  purely  private  coverage  look  implausible  in  the  near 
future.  Clearly,  more  fundamental  changes  will  require  more  government 
involvement,  either  through  direct  or  indirect  subsidies  or  through  some 
form  of  mandates  or  coercion.  Again,  this  should  not  be  surprising. 
If  the  poor  and  near  poor  cannot  or  do  not  cover  themselves  voluntarily, 
someone  else  must  pay  for  their  care,  at  least  in  part. 

C     Public  Sector  Approaches 

Any  model  of  coverage  and  care  for  the  medically  indigent  must 
address  four  basic  questions:  who  should  be  eligible;  what  should  be 
the  nature  of  the  product  or  program;  how  should  it  be  financed;  and 
how  should  it  be  administered.^^'  This  Article  next  examines  a  number 


^•*On  the  problems  of  small  versus  large  groups  in  insurance  markets,  see  Bovbjerg, 
supra  note  24. 

^'^Differences  stem  mainly  from  adverse  selection,  increased  sales  and  administrative 
expenses,  and  instability  over  time.  See  generally  id. 

^2'There  are  many  ways  to  characterize  options  for  indigent  coverage  and  care,  and 
each  author  tends  to  develop  his  own.  These  four  issues  cover  the  fundamental  choices. 
For  somewhat  different  categorizations,  see,  e.g.,  IHPP,  supra  note  136;  State  and  Local 
Government  Responsibilities,  supra  note  93;  Bartlett,  Overviev/  of  Public  Policy  Options 


894  INDIANA  LAW  REVIEW  [Vol.  19:857 

of  models  and  the  different  ways  they  attempt  to  answer  these  questions. 

1.  Eligibility  for  Assistance. — The  uncertain  nature  of  medical  in- 
digency makes  it  difficult  to  determine  who  should  be  eligible.  One 
problem  is  the  difficulty  of  deciding  what  constitutes  "need."  Taxpayers 
and  the  political  systems  that  represent  them  are  unwilling  to  finance 
unlimited  amounts  of  everything  called  "medical  care"  for  all  those  who 
cannot  or  do  not  provide  for  themselves.  From  a  policy  perspective,  it 
is  clearly  inappropriate  to  undercut  incentives  for  self-help  and  to  promote 
"free  riding"  by  many  people  who  would  normally  insure  themselves 
but  who  would  happily  take  free  public  assistance  instead. 

Another  problem  with  defining  eligibility  in  advance  is  that  relevant 
circumstances  are  not  fixed:  employment  status  changes,  and  people's 
incomes  go  up  and  down,  as  does  their  medical  spending.  The  inability 
to  foresee  such  changes  compHcates  the  operation  of  an  insurance-style 
program,  which  contemplates  coverage  for  a  defined  population  over  a 
preset  time  period.  The  uninsured,  in  notable  contrast,  are  a  constantly 
shifting  and  unstable  grouping. 

Nonetheless,  some  ehgibility  guidelines  must  be  created,  using  income, 
assets,  medical  status,  and  other  characteristics  of  potential  eligibles. 
One  way  to  deal  with  shifting  circumstances  is  to  allow  administrators 
discretion  to  reevaluate  ehgibility  on  a  continuous  basis  (for  each  hospital 
admission,  for  example).  A  major  legal  question  is  to  what  extent 
administrators  will  be  allowed  discretion  to  grant  or  deny  eligibility  for 
unusual  circumstances;  indeed,  existing  medical  indigency  programs  often 
have  extremely  vague  standards.  These  standards  could  be  difficult  to 
sustain  against  an  attack  on  due  process  grounds. ^^^  A  major  practical 
concern  is  that  constant  reconsideration  is  not  only  expensive  for  public 
administrators  but  also  a  deterrent  to  private  actors  who  may  be  at  risk 
as  a  result  of  a  finding  of  non-eligibility.  Vagueness  makes  it  difficult 
for  both  eligibles  and  providers  who  deal  with  them  to  know  where 
they  stand;  this  uncertainty  must  hurt  access  to  care  for  these  uncertain 
eligibles. 

At  any  given  level  of  public  spending,  there  is  a  clear  trade-off 
between  covering  more  people  and  providing  more  benefits:  the  more 
people  covered,  the  higher  the  expense.  Indeed,  of  any  design  decision, 
eligibility  has  the  greatest  impact  on  total  program  spending.  The  quickest 
way  to  increase  or  decrease  spending  is  to  add  to  or  subtract  someone 


to  Improve  Access  for  the  Medically  Indigent,  in  Academy,  supra  note  136,  at  47;  Butler, 
supra  note  136;  Hughes,  Local  Anesthetics:  A  Look  at  States'  Programs  for  the  Uninsured, 
Health/PAC  Bulletin,  November  1986,  at  11;  Lewin  &  Lewin,  Health  Care  for  the  Unin- 
sured, Bus.  &  Health,  September  1984,  at  9;  Wilensky,  Underwriting  the  Uninsured: 
Targeting  Providers  or  Individuals,  in  Uncompensated  Hospital  Care,  supra  note  30,  at  148. 
"^5ee  Butler,  supra  note  136;  State  and  Local  Government  Responsibilities,  supra 
note  93,  at  19-22. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  895 

from  the  rolls.  Other  program  adjustments  have  a  much  smaller  fiscal 
impact  than  completely  dropping  or  adding  an  additional  person. 

One  way  to  avoid  having  to  make  an  all-or-nothing  eligibility  decision 
is  to  require  people  to  contribute  something  on  their  own  on  an  income- 
related  basis,  even  if  they  receive  public  assistance.  Public  assistance 
then  subsidizes  self-help  rather  than  wholly  replacing  it.  This  can  be 
done  in  advance  by  making  beneficiaries  share  in  premium  payments, 
or  after  the  fact,  by  making  them  co-pay  for  incurred  medical  expenses. 
Nevertheless,  requiring  even  partial  payments  from  poor  people  in  need 
of  care  is  distasteful  to  many;  cost  sharing  under  Medicaid  has  met 
with  considerable  political  reluctance. ^^^  Moreover,  it  has  often  proven 
difficult  for  providers  to  be  very  vigorous  or  effective  in  collecting  their 
unpaid  share  of  bills  from  a  relatively  poor  population. 

Another  possibility  is  to  target  specific  groups  seen  as  fiscally  or 
medically  needier  than  others  or  those  for  whom  the  public  investment 
in  care  is  perceived  to  have  the  largest  benefit.  The  most  obvious  group 
on  both  these  counts  is  composed  of  low-income  children  and  expectant 
and  recently  delivered  mothers.  Numerous  states  are  beginning  to  target 
Medicaid  expansions  in  this  manner;  the  same  could  hold  true  for  other 
public  efforts  to  aid  the  indigent. ^^"^ 

Of  course,  setting  eligibility  standards  to  aid  the  medically  indigent 
is  more  easily  described  in  the  abstract,  as  here,  than  actually  imple- 
mented. As  already  noted,  the  concept  of  medical  indigency  is  itself  not 
easy  to  define. ^^^  Numerous  programmatic  problems  arise  in  defining 
what  support  to  provide  to  people  at  what  levels  of  income  and  assets: 
For  example,  over  what  period  of  time  is  income  measured?  What  assets 
count,  including  those  of  family  members,  and  how  are  they  to  be 
valued?  What  "spend  down"  of  income  or  assets  (to  meet  large,  un- 
covered medical  bills)  makes  an  otherwise  non-indigent  person  eligible?^^^ 
Once  an  operational  definition  of  medical  indigency  is  created,  including 


^^^Traditionally,  Medicaid  programs  have  not  been  allowed  to  charge  co-payments, 
although  this  has  changed  somewhat  of  late.  See  Cost  Sharing  by  Recipients,  3  Medicare 
&  Medicaid  Guide  (CCH)  1  14,731  (March  1983). 

^^See,  e.g.,  Dallek,  States  Study  Health  Care  for  the  Uninsured  Poor,  18  Clear- 
inghouse Rev.  740,  743  (1984);  Kosterlitz,  Concern  About  Children,  Nat'l  J.,  Sept.  20, 
1986,  at  2255  (state  task  forces  have  recommended  special  attention  to  children  in  Colorado 
and  Texas,  for  example).  Recent  federal  legislation  has  allowed  expanded  coverage.  See 
infra  note  237. 

^"See  supra  note  9. 

^^^Medicaid  has  of  course  had  to  create  numerous  rules  and  administrative  mechanisms 
to  decide  eligibility;  eligibility  is  generally  conceded  to  be  the  most  complex  and  difficult 
part  of  Medicaid  to  describe  or  understand.  See,  e.g.,  Joe,  Meltzer  &  Yu,  Arbitrary  Access 
to  Care:  The  Case  for  Reforming  Medicaid,  Health  Aff.,  Spring  1985,  at  59.  Complexities 
make  it  difficult  even  to  know  how  many  people  are  eligible  for  any  Medicaid  program 
at  a  particular  time;  hence  reliable  program  statistics  focus  on  the  number  of  known 
"recipients"  of  covered  care.  See,  e.g.,  J.  Holahan  &  J.  Cohen,  supra  note  18,  at  45. 


896  INDIANA  LAW  REVIEW  [Vol.  19:857 

of  necessity  lack  of  adequate  health  insurance,  it  becomes  difficult  to 
avoid  "free  riding"  by  eligible  beneficiaries  who,  absent  pubUc  aid, 
would  cover  themselves  through  their  own  or  their  employers'  efforts. 
Even  many  low-income  people  have  some  insurance.  Various  strategies 
exist  to  address  this  problem,  but  none  is  perfect. ^^^ 

2.  The  Product:  Hospital  Payment  vs.  Insurance. — What  is  to  be 
provided  to  those  who  are  eUgible?  Should  public  aid  focus  only  on 
hospital  services,  or  should  it  instead  provide  for  broader  availability 
of  medical  services,  typically  through  an  insurance-like  mechanism?  Either 
approach  can  use  public  or  private  hospitals  or  insurance  plans. 

a.  Hospital-based  programs. — Three  basic  program  models  focus 
on  hospitals.  The  first  is  to  operate  a  public  hospital  or,  increasingly, 
to  contract  with  a  private  entity  to  operate  it.  Under  the  pubHc  hospital 
model,  the  hospital  not  only  provides  services  but  also  determines  eH- 
gibility  and  benefits,  since  it  is  typically  left  to  the  hospital  to  decide 
whom  to  serve,  in  what  order,  and  how  much  care  to  give.  It  can  be 
difficult  to  establish  good  pubhc  budgetary  control  over  these  hospital 
choices.  Public  hospitals  have  been  an  important  source  of  care  for  the 
medically  indigent,  but  the  trend  is  toward  reducing  rather  than  increasing 
the  public  role  in  this  area.^^^ 

A  second  possibility  is  to  contract  with  a  number  of  hospitals,  pubhc 
and  private,  for  the  delivery  of  particular  care  to  a  particular  population. 
This  model  is  often  followed  for  small,  specific  public  health  programs, ^^^ 
but  is  less  often  used  for  general  medical  care  for  the  medically  indigent. ^^^ 
Its  use  could  be  expanded,  A  major  advantage  of  contracting  over  the 
public  hospital  approach  is  that  it  may  provide  some  competition  among 
hospitals  for  the  contract(s).  In  any  event,  in  many  areas  there  is  no 
public  hospital,  and  the  contract  approach  offers  a  simple  way  to  pay 
for  care. 


"^Eligibility  standards  can  be  set  very  stringently  to  cover  only  the  desperately  poor, 
who  can  seldom  contribute  to  their  own  coverage  in  any  case.  But  this  eliminates  the 
working  poor,  with  some  income,  who  contribute  large  numbers  of  uninsured.  A  "sliding 
scale"  of  income-related  assistance  is  a  promising  alternative,  but  requires  ongoing  ad- 
ministrative complexity  either  to  bill  beneficiaries  for  their  share  of  public  premiums  or 
to  give  them  "vouchers"  to  buy  private  coverage.  Another  mechanism  is  to  offer  assistance 
to  only  the  "hard  core"  uninsured,  for  example,  by  requiring  that  beneficiaries  have  gone 
two  years  without  any  private  coverage.  This  discourages  free  riding  but  again  leaves 
uncovered  many  otherwise  deserving  potential  eligibles.  Requiring  "maintenance  of  effort" 
in  terms  of  employers'  buying  private  insurance  is  another  possibility,  but  is  administratively 
complex:  monitoring  and  enforcement  for  hundreds  of  thousands  of  small  workplaces 
would  be  needed,  more  if  individual  self-help  were  required. 

^^^See  supra  notes  57,  58,   142  &  143  and  accompanying  text. 

^^"^See  supra  note  145  and  accompanying  text. 

"°An  exception  is  Iowa  where,  with  state  funds,  the  University  of  Iowa  Hospital  and 
Clinics  provide  "free"  care  to  all  county-certified  indigents  (up  to  a  preset  quota)  from 
all  over  the  state.  See  IHPP,  supra  note  136,  at  139. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  897 

A  third  model,  already  in  use  in  many  states,  is  to  cover  a  group 
of  qualifying  hospitals  under  a  ''vendor  payment"  program. ^^i  Under 
this  model,  eligibility  standards  may  be  defined  by  the  program,  with 
hospitals  put  at  risk  to  obtain  verification  of  patients'  eligibility  before 
delivering  nonemergency  services. 

These  options  have  been  aggregated  under  the  rubric  of  hospital- 
based  approach  because  by  far  the  bulk  of  such  programs'  spending 
normally  goes  to  hospitals.  A  Hmited  amount  of  non-hospital  outpatient 
care  could  also  be  provided  through  direct  dealings  with  non-hospital 
providers,  primarily  those  affiliated  with  public  health  systems.  Public 
health  systems  provide  various  primary,  preventive,  and  other  medical 
services  through  pubhc  health  clinics  operated  by  local  governments  and 
staffed  with  public  health  nurses,  doctors,  and  others. ^^^ 

The  major  advantage  of  the  hospital-based  approach  is  that  it  builds 
on  the  existing  system.  After  all,  hospitals  deliver  the  most  crucial  care, 
receive  the  bulk  of  current  spending  on  the  medically  indigent,  and 
provide  the  most  uncompensated  care.  The  other  advantage  of  a  hospital- 
oriented  approach  is  its  relative  ease  of  operation  and  finance.  The 
number  of  hospitals,  especially  public  hospitals,  is  relatively  small,  which 
facilitates  dealing  with  them.  It  would  be  far  more  difficult  to  deal  on 
the  same  basis  with  physicians  or  other  more  numerous  providers. 

b.  Medicaid  and  lesser  * 'insurance"  programs,  (i.)  Advantages  of 
insurance. — The  second  basic  approach  is  not  hospital-oriented  but  rather 
recipient-oriented — in  short,  insurance  or  something  very  much  like  it. 
Insurance-style  programs  cover  a  broader  spectrum  of  care  and  determine 
eligibility  not  merely  for  one  hospital  episode,  but  for  a  set  period  of 
time,  much  as  private  insurance  enrolls  people  for  a  year  or  for  some 
other  term  of  coverage. 

Paying  only  for  hospital  care  means  covering  only  the  most  expensive 
care  and  forgoing  whatever  possibilities  exist  to  treat  medical  problems 
before  they  become  sufficiently  serious  to  warrant  institutionalization. 
It  also  delegates  to  hospitals  considerable  control  over  who  is  to  receive 
care  and  to  what  extent.  Moreover,  if  only  public  hospitals  or  a  limited 
number  of  private  hospitals  specialize  in  care  to  the  poor,  a  hospital- 
oriented  approach  also  fails  to  promote  quality  competition,  which  may 
be  important  in  assuring  that  poor  people  get  adequate  care.  There  is 
also  some  danger  that  any  hospitals  designated  under  a  hospital-only 
approach  would  be  at  least  perceived  as  being  lower  quality,  welfare- 
style  hospitals  and  hence  would  be  shunned  by  the  insured  middle  class. 

In  contrast,  an  insurance  entitlement  empowers  the  patient  rather 


^^^See,  e.g.,  Butler,  supra  note  136,  at  19-20;  see  supra  text  accompanying  notes  146 
&  147. 

"^See,  e.g..  Role  of  State  and  Local  Governments,  supra  note  134;  Public  Health 
Foundation,  supra  note  135. 


898  INDIANA  LAW  REVIEW  [Vol.  19:857 

than  the  provider.^"  Giving  people  control  over  their  own  insurance 
money  gives  them  a  measure  of  dignity  in  contrast  to  shunting  them  to 
a  "charity"  hospital.  It  also  allows  both  patients  and  providers  to  plan 
for  medical  care  to  a  greater  extent.  Moreover,  giving  people  the  resources 
with  which  to  "shop  around"  may  promote  desirable  quality  competition. 

Quality  is  also  enhanced  by  hospitals'  and  doctors'  serving  the 
medically  indigent  alongside  better  funded  and  possibly  more  demanding 
patients.  Covering  more  than  hospital  services  promotes  health  main- 
tainence  and  thus  avoids  some  needs  for  inpatient  care.  This  method 
may  or  may  not  save  money  overall,  but  it  certainly  makes  people  better 
Qff  234  Finally,  under  an  insurance  plan,  a  partial  public  subsidy  is  more 
feasible  because  the  beneficiaries'  share  is  collected  in  advance,  when 
they  are  more  likely  to  be  healthy  and  employed.  Collecting  at  the  time 
of  medical  need  or  thereafter,  as  with  the  hospital-based  plans  described 
above,  is  more  difficult.  For  all  of  these  reasons,  this  Article  strongly 
supports  insurance-style  programs  for  the  medically  indigent,  to  the  fullest 
extent  that  they  are  politically  and  economically  feasible. 

Economic  feasibility  is,  of  course,  the  Achilles'  heel  of  this  insurance 
approach.  Broad  coverage  can  be  far  more  expensive  than  simply  relying 
on  public  hospitals,  both  because  the  price  per  unit  of  service  may  be 
higher  and  because  a  great  deal  more  care  may  be  delivered  and  con- 
sumed. ^^^  The  great  challenge,  then,  for  those  who  favor  an  insurance- 
style  approach  is  to  find  ways  to  provide  coverage  that  is  less  expensive 
than  conventional  approaches  or  to  persuade  the  electorate  that  expansion 
of  existing  programs  is  fiscally  prudent  and  a  good  medical  value. 

(ii.)  Options  for  expanding  Medicaid. — The  best  known  and  by  far 
the  largest  insurance-style  approach  is  Medicaid.  Indeed,  the  most 
straightforward  way  to  expand  coverage  for  the  medically  indigent  would 
be  to  cover  more  poor  people  under  Medicaid.  For  states,  Medicaid  is 
a  good  insurance  "buy"  because  the  federal  government  pays  half  or 
more  of  program  spending  on  an  open-ended  basis.  Medicaid  coverage 
could  be  expanded  by  raising  the  income  standards  for  eligibility,  by 
choosing  to  cover  people  in  optional  categories  such  as  two-parent  families 
or  children  aged  18-21  or  by  operating  "medically  needy"  programs  that 
allow  people  to  "spend  down"  to  eligibility. ^^^  Additional  expansions 

"^For  one  view  of  the  importance  of  empowering  patients,  see  Bovbjerg  &  Held, 
Ethics  and  Money:  The  Case  of  Kidney  Dialysis  and  Transplantation,  Topics  in  Hosp. 
L.,  Sept.  1986,  at  55. 

^^"♦It  is  poorly  appreciated  that  much  so-called  "preventive"  medical  care  is  not  cost- 
effective,  that  is,  does  not  save  a  dollar  in  prevented  care  for  every  dollar  invested  in 
prevention.  See  generally  L.  Russell,  Is  Prevention  Better  Than  Cure?  (1986). 

^"People  without  insurance  now  get  much  less  care  even  though  they  are  sicker. 
Giving  those  people  coverage  can  thus  be  expected  at  least  to  double  the  amount  of  care 
that  they  get  in  hospitals  and  perhaps  similarly  for  outpatient  services.  See  supra  Table 
4  &  note  27. 

236pg^  states  maximize  federal  financial  participation  in  Medicaid  by  setting  the  highest 
allowable  income  limits  and  covering  all  optional  eligibility  categories.  See  generally  J. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  899 

would  be  possible  if  federal  requirements  for  categorical  eligibility  as 
well  as  low  income  were  eased.^^^  However,  the  fact  that  states  have 
not  expanded  Medicaid  eligibility  indicates  that  they  think  it  is  too 
expensive  to  cover  more  people  in  this  way— even  with  federal  subsidies. ^^^ 
The  one  major  area  of  program  expansion  in  recent  years  has  been  to 
add  coverage  for  poor  children  and  their  mothers. ^^^  Of  course,  states 
are  free  to  cover  others  as  they  please,  without  federal  assistance. 

(Hi.)  New  economizing  options.— U  Medicaid  and  other  traditional 
programs  are  perceived  as  too  expensive,  what  alternatives  exist?  The 
keys  to  economizing  are  to  hold  down  the  price  and  utilization  of  medical 
care.  This  must  be  accomplished  without  leaving  uncovered  large  expenses 
for  catastrophic  care,  a  central  goal  of  good  coverage.  It  is  especially 
important  to  limit  expensive  hospital  care,  through  some  combination 
of  provider  and  patient  incentives,  prescreening  of  admissions,  reviews 
of  care  given,  and  judicious  substitution  of  outpatient  for  inpatient  care. 

The  other  critical  element  is  to  lower  prices  paid  to  providers, 
particularly  hospital  payments. ^^^  From  the  standpoint  of  the  hospitals, 

HoLAHAN  &  J.  Cohen,  supra  note  18.  This  is  one  reason  that  only  about  AO^q  of  poor 
people  are  Medicaid  eligible.  Id.  For  a  good  short  review  of  Medicaid  eligibility  options, 
see  Reymer,  Medicaid  Eligibility  Options,  in  Affording  Access  to  Quality  Care  I  (R. 
Curtis  &  I.  Hill  eds.   1986). 

"'Recent  federal  amendments  have  taken  a  first  step  toward  easing  categorical  re- 
quirements by  allowing  coverage  of  expectant  mothers  and  poor  children  not  receiving 
AFDC  cash  assistance.  See  Consolidated  Omnibus  Budget  Reconciliation  Act  of  1985, 
Pub.  L.  No.  99-272,  §§  9501,  9511,  100  Stat.  82,  201,  212;  Omnibus  Budget  and  Recon- 
ciliation Act  of  1986,  Pub.  L.  No.  99-509,  100  Stat.  ;  see  also  Kosterlitz,  Breaking 

Medicaid's  Link  with  AFDC,  Nat'l  J.,  Sept.  20,  1986,  at  2256.  But  more  significant  expan- 
sions seem  unlikely.  The  current  administration  has  sought  to  cap  federal  Medicaid  obliga- 
tions rather  than  allowing  states  to  expand  them  yet  further.  R.  Bovbjerg  &  J.  Holahan, 
supra  note  18,  at  7-10,  and  budget  deficits  make  congressional  initiative  unlikely  as  well. 
See  also  supra  note  63. 

"*The  number  of  Medicaid  recipients  has  remained  stable  in  the  1980's,  despite 
increased  need  for  coverage.  See  supra  notes  18-19  and  accompanying  text.  See  also  J. 
Holahan  &  J.  Cohen,  supra  note  18,  at  40-43. 

"^The  1981  Medicaid  amendments  gave  states  the  authority  to  target  children's  care 
without  having  to  provide  full  medically  needy  benefits  for  the  elderly  and  disabled,  who 
consume  far  greater  resources  for  less  obvious  returns  in  avoiding  other  long  term  medical 
costs.  R.  Bovbjerg  &  J.  Holahan,  supra  note  18,  at  33-35.  In  the  case  of  children,  it 
is  possible  to  provide  cost-effective  care  by  expanding  preventive  and  prenatal  services 
and  thus  to  avoid  many  of  the  very  large  bills  which  can  accompany  difficult  deliveries 
and  disabled  or  crippled  children.  Subsequent  federal  changes  have  both  required  and 
allowed  more  coverage  of  children.  See  supra  note  237. 

^^°Of  course,  a  key  feature  of  any  such  program  for  the  indigent  would  be  a  requirement 
that  the  provider  accept  payment  from  the  program  as  payment  in  full,  except  perhaps 
for  specified  cost  sharing  by  patients.  That  is  currently  done  in  both  Medicare  and  Medicaid 
with  regard  to  hospitals.  See  Admissions  and  Quality  Review,  1  Medicare  &  Medicaid 
Guide  (CCH)  t  4227  (Nov.  1984);  and  Reimbursement  in  General,  3  Medicare  &  Medicaid 
Guide  (CCH)  1  14,723  (Oct.  1984)  (Medicare);  Limitations  on  Charges  to  Beneficiaries, 
3  Medicare  &  Medicaid  Guide  (CCH)  t  20,883Q  (Oct.  1985);  dind  Acceptance  of  State  Pay- 
ment as  Payment  in  Full,  4  Medicare  &  Medicaid  Guide  (CCH)  1  21,833  (June  1985) 
(Medicaid). 


900  INDIANA  LAW  REVIEW  [Vol.  19:857 

this  may  not  be  disadvantageous  if  it  helps  reduce  the  total  amount  of 
uncompensated  care  and  increase  the  number  of  paying  patients.  Of  course, 
one  must  take  care  not  to  reduce  payments  so  far  as  to  deny  beneficiaries 
desired  access  to  care.^'*^  Prices  can  be  held  down  either  by  setting  prices 
administratively  for  public  programs,  by  regulating  prices  of  providers, 
or  by  using  bidding  or  negotiation  to  select  providers  who  are  willing 
and  able  to  accept  lower  prices  for  a  higher  volume  of  patients. ^''^  Benefits 
redesign — better  targeting  of  benefits  to  needs — may  also  be  helpful;  the 
optimal  mix  of  benefits  is  probably  not  provided  in  the  traditional 
insurance  policy.  ^''^ 

What  new  arrangements  embody  these  principles?  Perhaps  the  best 
known  example  is  the  Health  Maintenance  Organization  (HMO).  HMO's 
use  restricted  panels  of  physicians  and  hospitals  to  deliver  care  and  are 
thought  to  be  less  costly  than  conventionally  provided  insurance  on  a 
fee-for-service  basis  with  open  access  to  all  providers  of  the  patient's 
choice.^  Many  state  Medicaid  programs  now  promote  HMO's  for  their 
eligible  participants;  programs  in  California  and  Michigan  have  long 
advocated  this  approach. ^"^^  Unfortunately,  HMO's  do  not  exist  in  all 
parts  of  the  country. 

Using  HMO's  to  care  for  the  medically  indigent  presents  other 
problems  as  well.  First,  existing  HMO's  would  want  to  be  prepaid  on 
a  monthly  basis  and  guaranteed  enrollment  for  six  months  or  more,  as 
is  possible  under  Medicaid. ^"^^  However,  the  medically  indigent  can  be 
a  floating  population;  some  are  transient,  others  are  only  intermittently 
uncovered  by  private  insurance  or  Medicaid.  Second,  HMO's  are  geared 
to  provide  comprehensive,  high  quality  care  at  a  price  not  unlike  that 
charged  by  private  conventional  insurance.  As  a  result,  HMO's  cost 
considerably  more  per  capita  than  what  a  state  might  pay  for  a  public 
hospital  or  for  a  limited  vendor  payment  program. 

^'The  same  holds  true  for  physicians:  It  is  desirable  not  to  overpay  physicians,  but 
if  physicians  are  underpaid,  they  will  not  provide  enough  of  the  services  needed  to  keep 
people  healthy  and  out  of  hospitals.  This  has  been  an  endemic  problem  for  states'  Medicaid 
programs.  Low  physician  payment  often  results  in  people  going  to  hospital  emergency 
rooms  or  outpatient  departments  for  primary  care  that  would  have  been  much  more 
cheaply  provided  in  physicians'  offices.  See  generally  J.  Holahan  &  J.  Cohen,  supra 
note  18,  at  62. 

^^See  generally  Bovbjerg,  Held  &  Pauly,  supra  note  58;  infra  text  accompanying 
notes  253-56. 

^^Long  distance  transportation  (e.g.,  to  less  expensive  outlying  institutions)  or  non- 
traditional  providers  for  chronic-care  services  are  two  services  not  conventionally  covered 
but  which  could  be  cost-effective  if  implemented  on  a  controlled  basis. 

^The  extent  of  HMO  savings  has  long  been  debated.  It  is  clear  that  people  in  HMO's 
use  significantly  less  hospital  care  than  others.  H.  Luft,  Health  Maintenance  Orga- 
nizations: Dimensions  of  Performance  (1981).  It  is  not  clear  to  what  extent  this  is  due 
to  HMO  economies  rather  than  to  self-selection  by  enroUees. 

^'R.  Bovbjerg  &  J.  Holahan,  supra  note  18,  at  57. 

^*M  at  58. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  901 

Another  possibility  is  the  so-called  Preferred  Provider  Organization 
(PPO).^^  Using  existing  hospitals  and  doctor  practices,  PPO's  operate 
like  a  cross  between  conventional  insurance,  covering  all  providers,  and 
HMO's,  with  a  limited  Hst  of  covered  providers.  PPO's  encourage 
enrollees  to  use  one  of  a  selected  group  of  so-called  preferred  providers, 
who  have  agreed  to  hold  down  spending  either  by  discounting  their 
normal  fees  or  by  agreeing  to  utilization  reviews  or  other  cost-containment 
measures. 

PPO  beneficiaries  have  fewer  cost  sharing  requirements  for  using 
preferred  providers  than  for  using  other  providers,  who  are  still  covered 
but  at  a  lower  rate.  Both  beneficiaries  and  preferred  providers  profit 
from  this  approach.  Beneficiaries  receive  full  benefits  from  a  restricted 
Hst  of  providers,  yet  retain  the  ability  to  go  to  anyone  at  some  additional 
expense.  Preferred  providers  benefit,  despite  lower  fees  or  restrictions, 
because  they  can  expect  to  receive  additional  patients  from  the  PPO  or 
at  least  to  retain  patients  they  might  otherwise  have  lost.  Since  their 
inception  in  the  early  1980's,^'^^  PPO's  have  grown  rapidly,  but  have 
only  recently  expanded  their  marketing  to  include  small  groups  and 
individuals.  It  is  not  known  whether  any  states  or  localities  have  attempted 
to  contract  with  private  PPO's  to  enroll  the  medically  indigent.  As  with 
HMO's,  PPO's  currently  compete  primarily  in  the  employment  group 
market  and  provide  relatively  complete  benefit  packages  and  high  quality 
care. 

Another  cost  containment  approach,  which  can  be  used  in  con- 
junction with  either  conventional  insurance  or  alternative  systems  like 
HMO's  and  PPO's,  involves  "managed  care."  Management  means  in- 
creased control  over  care  by  physician  or  nonphysician  reviewers.  One 
common  approach  is  "case  management"  by  a  primary  care  physician, 
an  internist,  or  a  family  physician.  These  physicians  act  as  the  patient's 
point  of  entry  for  all  care,  controlling  referrals  to  specialists  and  hospitals 
and  often  reviewing  the  latters'  care  and  charges.  Traditional  medical 
practice  has  long  been  conceived  as  similarly  beginning  with  a  primary 
care  provider  who  then  makes  appropriate  referrals,  but  in  practice, 
many  patients  have  gone  directly  to  high-priced  specialists  or  hospital 
care  on  their  own.  Moreover,  even  transfers  from  primary  care  physicians 
have  not  normally  involved  fiscal  management,  although  some  medical 
follow-up  may  exist.  In  contrast,  case  managers  act  like  true  "gatekeep- 
ers" by  controlling  access  to  and  use  of  care  on  both  economic  and 
medical  grounds.  Various  models  exist,  not  all  of  which  have  been 
successful.  ^"^^ 

^^See,  e.g.,  Gabel  &  Ermann,  Preferred  Provider  Organizations:  Performance,  Prob- 
lems, and  Promise,  Health  Aff.,  Spring  1985,  at  24. 

^^See  Bovbjerg,  supra  note  24. 

^'It  is  possible,  for  example,  to  put  financial  risk  on  managing  physicians,  or  merely 
to  reward  them  for  being  parsimonious  in  their  patients'  use  of  medical  resources. 


902  INDIANA  LA  W  REVIEW  [Vol.  19:857 

A  number  of  areas  are  experimenting  with  case  management  as  a 
way  of  holding  down  medical  costs  while  providing  broad  access  to  well 
integrated  medical  care.  Thus,  management  can  potentially  have  positive 
effects  on  health  as  well  as  on  spending.  The  state  of  Kansas,  for 
example,  has  made  some  progress  in  using  case  management  for  the 
medically  indigent  population, ^^^  as  has  the  state  of  Michigan  through 
its  Medicaid  program. ^^^ 

Outside  reviewers  can  also  "manage"  care  indirectly  through  such 
mechanisms  as  prescreening  of  hospital  admissions,  concurrent  evalua- 
tions of  the  necessity  for  prolonged  hospital  stays,  or  retrospective  review 
of  utilization  and  claims.  These  practices  are  now  common  in  large 
private  health  insurance  plans,  but  less  so  in  public  plans. ^^^ 

Of  course,  achieving  improvements  through  case  management  de- 
pends on  there  being  something  to  manage.  Savings  are  possible  where 
disjointed  and  perhaps  over-generous  coverage  has  led  to  previous  over- 
spending, so  that  cutbacks  are  not  deleterious.  But  the  main  problem 
for  the  uninsured  is  prior  lack  of  care,  not  over-service.  One  could 
implement  managed  care  for  a  previously  uncovered  population,  but  the 
manager  must  be  able  to  provide  a  minimum  set  of  benefits — both 
primary  care  and  necessary  specialists,  in  addition  to  hospital  care — well 
beyond  what  is  currently  available  to  many  or  most  of  those  now 
medically  indigent.  Such  management  should  make  coverage  less  expensive 
than  traditional  open  access  insurance,  but  it  will  almost  surely  cost 
more  than  the  patchwork  of  care  now  available  to  the  uninsured — 
because  more  care  will  be  dehvered. 

Mention  should  be  made  of  two  other  major  cost-containment  ideas: 
provider  and  patient  incentives  to  economize.  Providers  can  be  motivated 
to  reduce  their  use  of  medical  resources  if  they  are  prepaid  some  fixed 
amount,  rather  than  being  "reimbursed"  for  their  incurred  costs  or 
charges  as  under  the  traditional  practice  of  Medicare,  Medicaid,  and 
private  plans  ahke.  The  1980's  have  seen  a  virtual  "buyer's  revolution" 
of  refusal  to  accept  provider-dictated  spending.^" 


^^^See  Hansen,  Kansas'  Medical  Coverage  Programs  for  the  Poor:  A  Targeted  Approach 
Through  State-Financed  and  State-Administered  Programs,  in  Academy,  supra  note  136, 
at  E-1. 

^^'See,  e.g.,  McDonald  &  Fairgrieve,  Michigan's  Experiment  with  Case  Management, 
20  Clearinghouse  Rev.  423  (Special  issue,  Summer  1986). 

^"For  private  developments  in  managing  health  spending,  see,  e.g.,  J.  Califano, 
supra  note  22;  P.  Fox,  W.  Goldbeck  &  J.  Spies,  supra  note  22.  Efforts  are  too  numerous 
and  varied  to  catalog  here;  many  are  reported  regularly  in  such  newsletters  as  Coalition 
Report  (U.S.  Chamber  of  Commerce,  Clearinghouse  on  Business  Coalitions  for  Health 
Action,  Washington,  D.C.)  and  Medical  Benefits  (Kelly  Communications,  Charlottesville, 
Va).  For  public-plan  developments,  see,  e.g..  Affording  Access  to  Quality  Care,  supra 
note  236,  especially  chapter  5  at  127  (Bartlett,  The  Management  of  Medicaid  Inpatient 
Hospital  Expenditures)  and  Chapter  8  at  201  (Neuschler,  Alternative  Financing  and  Delivery 
Systems:  Managed  Health  Care). 

^"See,  e.g.,  J.  Califano,  supra  note  22. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  903 

Prepayment  can  result  from  several  approaches.  First,  plans  may 
simply  set  prices  administratively  and  offer  them  to  providers  on  a 
"take  it  or  leave  it"  basis,  as  does  Medicare  with  its  prospective  payment 
system  for  hospitals  based  on  Diagnosis  Related  Groups  (DRG's).^^"* 
Alternatively,  preset  prices  can  be  arrived  at  voluntarily  through  bidding 
or  negotiation,  or  set  on  a  mandatory  basis  by  economic  regulation,  as 
are  hospital  rates  in  a  number  of  states. ^^^  Referral  or  admitting  physicians 
can  also  be  encouraged  to  economize  on  specialists'  treatment  or  hospital 
care  by  sharing  savings  with  them.^^^  One  concern  about  economizing 
incentives  is  naturally  that  providers  may  undersQTVQ,  just  as  generously 
rewarded  fee-for-service  practitioners  may  overserve. 

Finally,  patients  may  be  encouraged  to  save  in  similar  fashion — 
either  by  having  to  share  in  spending  (cost-sharing  through  deductibles, 
co-payments,  or  co-insurance)  or  by  being  allowed  to  share  in  savings 
below  expected  amounts.  However,  as  previously  discussed,  patient- 
oriented  strategies  are  generally  considered  less  desirable  for  poverty 
populations  than  for  the  insured  middle  class.  A  payment  requirement 
to  pay  X  dollars  per  visit  may  help  insured  patients  weigh  the  cost 
versus  the  value  of  care  without  preventing  them  from  proceeding;  for 
poor  people,  the  burden  looms  larger  relative  to  their  other  needs  and 
may  deter  them  from  getting  care  altogether. 

3.  Financing,  a.  Fiscal  requirements. — How  much  financing  is  needed 
to  cover  the  medically  indigent?  That  obviously  depends  on  one's  def- 
inition of  the  problem  and  on  how  generous  one  is  in  addressing  it. 
The  potential  range  is  $5-50  billion,  with  $15-20  billion  a  reasonable 
estimate  for  moderate  initiatives.  A  minimal  program  might  cover  only 
the  cost  of  non-elective,  uncompensated  hospital  care  that  is  already 
provided  to  "charity"  patients.  Such  care  totalled  about  $4-5  billion  in 
1986.^^^  Funding   such  care  through  a  pubhc  program  would  be  the 


^^'*See,  e.g.,  Bovbjerg,  Held  &  Pauly,  supra  note  58. 

^^^See,  e.g.,  id. 

^^^Some  case  management  strategies  do  this,  as  noted  supra  notes  249-52.  Similarly, 
some  HMO's  give  their  doctors  performance  bonuses.  And  some  hospitals  prepaid  by 
Medicare  have  sought  to  reward  physicians  for  holding  down  hospital  spending.  See  U.S. 
Gen.  Acct.  Off.,  Pub.  No.  HRD-86-103,  Medicare:  Physician  Incentive  Payments  by 
Hospitals  Could  Lead  to  Abuse  (1986).  Congress  has  acted  to  ban  under  Medicare  and 
Medicaid  any  payment  incentives  to  physicians  from  hospitals  or  risk  bearing  HMO's  to 
reduce  or  limit  services  to  patients.  Omnibus  Budget  ReconciUation  Act  of  1986,  Pub.  L. 
No.  99-509,  §  9313,   100  Stat.  ,  . 

^"The  figure  is  the  authors'  rough  estimate,  with  the  following  assumptions:  The 
1986  cost  of  uncompensated  hospital  care  is  $13  bilhon.  Cohodes,  supra  note  36  (citing 
estimates  by  American  Hosp.  Ass'n).  About  one-third  of  such  care  goes  to  charity  patients, 
as  designated  by  hospitals  themselves.  Sloan,  Valvona,  &  Mullner,  supra  note  31,  at  19. 
Approximately  two-thirds  of  such  care  is  for  non-elective  services.  Cf.  id.  at  30  (fully 
42%  of  relevant  hospital  charges  comes  from  two  categories,  childbirth  and  accidents  — 
both  non-elective  services).  Note  that  the  estimate  of  $4-5  billion  does  not  allow  for  an 
increase  in  hospital  service  generated  by  the  knowledge  among  hospitals  and  indigents 


904  INDIANA  LAW  REVIEW  [Vol.  19:857 

minimal  response  to  the  problems  of  the  medically  indigent. 

The  highest  reasonable  estimate  comes  from  assuming  coverage  for 
all  of  the  uninsured  and  underinsured  for  a  broad  range  of  services  to 
a  very  high  level  of  medical  spending — on  the  ground  that  in-depth 
coverage  for  all  is  needed  to  prevent  catastrophic  medical  expenses  from 
rendering  anyone  medically  indigent.  Full  coverage  implemented  on  a 
national  basis  could  easily  cost  $50  billion  dollars  more  a  year  than  is 
now  spent,  depending  on  how  rich  a  benefit  package  were  provided. ^^^ 
This  approach  would  constitute  national  health  insurance,  although  it 
might  not  closely  resemble  the  ambitious  federal  plans  of  the  1970's  in 
design  or  implementation. 

More  reasonable  estimates  of  a  program  to  cover  the  medically 
indigent  surely  lie  between  the  $5  and  $50  billion  extremes.  As  a  rough 
guess,  spending  $50  a  month  only  for  those  now  uninsured  who  are 
below  the  poverty  Une  would  cost  "only"  about  $6  billion  the  first  year, 
whereas  spending  $80  a  month  for  those  with  family  incomes  under  two 


alike  that  more  funds  were  available  to  cover  charity  care.  Depending  on  the  eligibility 
and  payment  rules  applied  under  a  new  system,  such  an  increase  could  be  substantial. 

2^^The  $50  billion  figure  derives  from  assuming  that  an  equivalent  of  30  million 
uninsured  person-years  currently  exist,  with  an  additional  20  million  underinsured  (i.e., 
not  protected  against  catastrophe).  Benefits  are  estimated  at  $100  per  month  for  the 
uninsured,  half  that  for  the  underinsured:  ($100/month/person  x  12  months/year  x  30 
million  person-years)  +  ($50/month/person  x  12  months/year  x  20  miUion  person-years) 
=  $48  billion.  No  allowance  is  made  for  increased  spending  due  to  people  cutting  their 
own  coverage  to  rely  on  government  help.  Discussion:  Some  35  miUion  people  were 
uninsured  in  March  1984,  probably  two-thirds  of  them  for  the  entire  year,  one-third  for 
part  of  the  year,  perhaps  averaging  six  months,  for  a  total  of  about  30  milUon  person- 
years.  Calculated  from  M.  Sulvetta  &  K.  Swartz,  supra  note  16,  at  3.  At  least  an 
additional  20  million  are  underinsured.  This  estimate  is  from  the  finding  that  in  1977 
24*^0-37%  of  population  was  underinsured  overall,  id.  at  19,  whereas  only  11%  was 
uninsured  at  the  time  of  survey,  id.  at  3.  See  also  Farley,  supra  note  11.  The  $100  and 
$50  figures  are  reasonable  guesses  for  moderate  coverage.  Average  per  capita  personal 
health  spending  for  the  entire  population  for  1986  is  estimated  at  $146  per  month.  Calculated 
from  data  in  Arnett,  McKusick,  Sonnefeld  &  Co  well.  Projections  of  Health  Care  Spending 
to  1990,  Health  Care  Festancing  Rev.,  Spring  1986,  at  1,  3,  12.  Spending  of  course 
varies  greatly  according  to  characteristics  of  the  insured  and  of  the  benefits  covered.  See, 
e.g.,  id.  at  20-32.  Medicare,  for  an  aged  and  disabled  population,  currently  spends  some 
$180  per  month  for  each  beneficiary,  not  counting  beneficiaries'  own  spending.  U.S.  Office 
OF  Management  &  Budget,  The  United  States  Budget  in  Brief  46-47  (1986)  ($67 
billion  in  federal  fiscal  1986  for  some  31  milhon  beneficiaries).  Medicaid  spends  about 
$159  per  month  per  recipient  overall,  although  nearly  half  goes  to  a  small  fraction  of 
eligible  recipients  receiving  long  term  care.  Id.  at  44  ($23,7  billion  federal,  $19.3  billion 
state  for  22.5  million  FY  1986  recipients).  Not  all  of  these  people  are  covered  for  the 
entire  year,  so  the  estimate  is  biased  low.  Federal  spending  in  1986  for  the  Federal 
Employees  Health  Benefits  Plan  averaged  fully  $221  per  month  per  covered  employee 
(each  with  an  unknown  number  of  dependents),  not  counting  employees'  share  of  premiums 
(about  25%  of  the  total  or  33%  more  than  the  federal  share)  or  required  cost  sharing. 
U.S.  Office  of  Management  &  Budget,  Budget  of  the  United  States  Government,  Ap- 
pendix, Fiscal  Year  1986  I-V  7  (1986)  [hereinafter  U.S.  Budget]. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  905 

times  the  poverty  level  would  cost  some  $20  billion.^^^  In  practice,  it 
would  not  be  sensible  to  cover  everyone  below  some  arbitrary  level  for 
100%  of  the  cost  and  no  one  above  it  at  all.  Such  abrupt  breaking 
points  (or  ** notches,"  as  they  are  often  called)  are  unfair  to  those  just 
above  them,  discourage  beneficiaries  from  earning  more  (or  reporting 
earnings),  and  encourage  non-beneficiaries  to  drop  to  covered  levels.  An 
intermediate  method  is  to  provide  graduated  support  in  the  boundary 
zone  (often  called  "shding  scale''  support),  which  probably  would  increase 
spending. 

In  comparison,  states  now  spend  about  $20  billion  a  year  in 
Medicaid, ^^^  and  almost  all  are  working  hard  to  cut  back  its  scope. ^^^ 
Moreover,  states  spent  an  additional  $24  billion  on  hospitals  and  other 
health  care  in  1985.^^^  Cities  and  counties  together  contributed  somewhat 
less,  about  $18  biUion  on  health  care  in  1984.^"  New  funding  for  the 
indigent  could  displace  some  existing  spending;  this  small  "savings" 
would  likely  be  overwhelmed  by  new  spending  generated  by  almost  any 
new  entitlement. 

b.  Funding  sources  and  limitations,  (i.)  State  taxes  and  federal 
preemption. — States  and  localities  have  numerous  funding  options  through 
taxation  or  mandates  on  individuals,  employers,  providers,  and  insurers. 
In  principle,  any  existing  state  tax  could  be  used  to  fund  programs  for 
the  medically  indigent,  whether  they  were  public  programs,  like  Medicaid, 
or  private  programs,  like  those  considered  in  the  next  subsection.  Tra- 
ditionally, these  taxes  include  the  state  income  tax  (for  most  states), 
city,  county,  and  state  property  taxes,  and  sales  and  excise  taxes.  Any 
or  all  could  be  used  for  these  purposes.  States  could  appropriate  general 
fund  monies  or  they  could  dedicate  a  particular  tax  levy  to  help  meet 
the  needs  of  the  medically  indigent.  Because  state  budgets  are  already 
hard  pressed,  new  revenues  are  probably  needed,  and  many  people  prefer 
to  raise  new  revenue  in  some  way  related  to  health — by  raising  so-called 
"sin  taxes"  on  tobacco  and  alcohol,  for  example.  Nevertheless,  it  is 
clear  that  such  taxes  by  themselves  probably  will  not  produce  sufficient 


^^'About  one-third  of  the  uninsured  are  uncovered  only  during  part  of  the  year, 
Farley,  supra  note  11,  so  that  they  would  not  need  new  assistance  for  the  full  year.  Also, 
the  estimates  do  not  include  newly  uninsured  people  taking  advantage  of  new  assistance. 

^^See  U.S.  Budget,  supra  note  258. 

^^See  generally  Affording  Access  to  Quality  Care,  supra  note  236;  J.  Holahan 
&  J.  Cohen,  supra  note  18. 

^^^U.S.  Bureau  of  the  Census,  Series  No.  GF84,  No.  3,  State  Government  Finances 
IN  1984,  at  2  (1985).  Not  all  of  such  spending  covers  medical  indigents,  of  course;  much 
goes  to  particular  classes  of  patients  not  based  on  income,  e.g.,  victims  of  tuberculosis, 
crippled  children. 

^"U.S.  Bureau  of  the  Census,  Series  No.  GF84,  No.  4,  City  Government  Finances 
in  1983-84  (1985)  and  Series  No.  GF84,  No.8,  County  Government  Finances  in  1983- 
84,  at  2  (1985). 


906  INDIANA  LAW  REVIEW  [Vol.  19:857 

revenue, ^^"^  and  there  is,  of  course,  considerable  political  resistance  to 
general  tax  increases. ^^^ 

Therefore,  funding  that  does  not  require  direct  taxation  of  individuals 
attracts  considerable  interest.  Public  funding  can  be  provided,  in  part, 
by  a  tax  or  assessment  on  hospitals  not  providing  a  specified  minimum 
amount  of  charity  care.  Under  this  approach,  all  hospitals  could  be 
required  to  provide  a  certain  percentage  of,  say,  their  gross  revenue  as 
charity  care.  Hospitals  providing  less  would  be  required  to  pay  the 
difference  into  the  fund.^^^  Public  policy  makers  may  find  such  taxation 
by  regulation  attractive  because  it  is  *'off  budget,"  or  at  least  off  their 
budgets. 

Adopting  this  concept  would  have  the  added  benefit  of  eliminating 
* 'dumping"  of  non-paying  patients  as  a  way  to  hold  down  prices  in  the 
increasingly  competitive  hospital  market.  Although  expensive,  it  would 
promote  access  to  inpatient  care  for  poor  people,  and  the  expense  would 
be  spread  among  paying  hospital  patients,  largely  insured  patients.  Of 
course,  a  standard  definition  of  charity  care,  as  compared  to  uncom- 
pensated care,  would  be  needed  to  exclude  bad  debts  of  those  capable 
of  paying.  And  administration  of  this  "program"  would  have  to  be  left 
mainly  to  hospitals  themselves. ^^^ 

One  might  also  attempt  to  reduce  the  number  of  uninsureds  gen- 
erally— not  only  the  medically  indigent — by  mandating  that  employers 
provide  health  insurance  to  their  employees.  The  state  of  Hawaii  currently 
has  such  a  program.  However,  a  legal  obstacle  prevents  other  states 
from  enacting  similar  programs.  The  federal  Employee  Retirement  In- 
come Security  Act  of  1974  (ERISA)  interferes  with  state  options  through 
its  regulation  of  employee  benefit  plans,  both  pension  plans  and  welfare 
benefit  plans. ^^^ 

^^'*See  Bartlett,  State  Level  Policies  and  Programs,  in  Academy,  supra  note  136,  at 
54,  60-61. 

^^^See  supra  note  56. 

^^The  Ohio  task  force  dubbed  this  the  "care  or  share"  approach.  Governor's 
Commission  on  Ohio  Health  Care  Costs:  Final  Report  (July  1984)  (summarized  in  J. 
LuEHRS  &  R.  Desonla,  supra  note  61,  at  37-38).  Hospital  taxes  could  also  be  based  on 
net  revenues,  number  of  licensed  or  occupied  beds,  or  other  measures.  Pooling  similar 
to  that  described  in  the  text  already  occurs  within  hospital  rate-setting  states  and  in  Florida, 
where  it  helps  fund  an  expanded  Medicaid  program.  E.g.,  Perkins,  Dallek,  Do  well  & 
Waxman,  State-Based  Financing  of  Indigent  Health  Care:  Promise  and  Problems  20 
Clearinghouse  Rev.  372,  372-75  (Special  Issue,  Summer  1986). 

^*^Such  charity  pooling  seems  impractical  to  extend  to  providers  other  than  hospitals 
because  there  are  so  many  of  them. 

2^«29  U.S.C.  §§  1001  et  seq.  (1982).  Welfare  benefit  plans  covered  under  ERISA 
include  those  that  provide  for  medical,  sickness,  accident,  and  other  non-pension  fringe 
benefits.  29  U.S.C.  §  1002(1)  (1982).  It  should  be  noted  that  nothing  in  ERISA  regulates 
the  contents  of  welfare  benefit  plans;  only  reporting  and  disclosure  requirements  were 
enacted,  according  to  conventional  wisdom  because  Congress  expected  national  health 
insurance  soon  to  supercede  all  existing  health  plans. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  907 

Intending  to  make  regulation  of  employee  benefit  plans  exclusively 
a  federal  concern,  ERISA  expressly  preempts  state  regulation  of  employee 
benefit  plans. ^^^  One  exception  to  this  ERISA  preemption  of  state  law 
is  that  states  may  continue  to  tax  and  regulate  insurance,  that  is,  insurance 
companies  and  insurance  contracts. ^^"^  The  Supreme  Court  has  upheld 
such  state  regulation  that  mandates  benefits  to  be  covered  in  health 
insurance  contracts,  for  example. ^^^  However,  the  Court  noted  that  ERISA 
prohibits  state  regulation  of  an  employer's  benefit  plan  that  is  "self- 
insured"  rather  than  placed  with  an  insurance  company,  as  this  would 
not  fall  under  the  "insurance  law"  exception  to  the  federal  preemption. ^^^ 
Increasingly,  especially  in  large  employment  groups,  health  benefits  are 
self-funded.^^^ 

Given  that  ERISA  prohibits  state  regulation  of  employee  benefit 
plans  other  than  through  the  avenue  of  insurance  regulation,  it  would 
seem,  a  fortiori,  that  states  cannot  mandate  that  such  plans  exist. ^^"^ 
Thus,  the  state  of  Hawaii  is  able  to  maintain  its  program  only  because 
of  specific  amendments  to  ERISA  that  "grandfather"  the  Hawaii  Prepaid 
Health  Care  Act.^^^  Of  course,  ERISA  could  be  further  amended  to 
grant  states  the  authority  to  require  private  insurance  coverage. 

It  might  be  possible  for  states  to  achieve  similar  "insurance"  goals 
through  their  power  to  tax  employers.  Clearly  ERISA  would  not  prohibit 
states  from  taxing  all  employers  to  fund  care  or  coverage  for  the 
uninsured,  for  example,  through  a  general  payroll  tax.  Whether  an  income 
tax,  because  it  is  related  to  ability  to  pay,  or  a  payroll  levy,  because 
it  is  related  to  the  number  of  employees,  is  the  more  equitable  method 
is  open  to  debate.  A  payroll  tax  would,  of  course,  tax  employers  already 
providing  coverage  in  order  to  help  those  not  now  providing  coverage, 
and  could  thus  considerably  hurt  incentives  to  insure,  especially  in  in- 


^^^29  U.S.C.  §  1144(a)  (1982). 

2™29  U.S.C.  §  1144(b)  (1982). 

^^'Metropolitan  Life  Ins.  Co.  v.  Massachusetts,   105  S.  Ct.  2380,  2393  (1985). 

^^^ERISA  expressly  provides  that  self-insured  plans  are  not  to  be  considered  "insurers" 
or  "insurance  companies"  for  the  purposes  of  state  regulation,  29  U.S.C.  §  1144(b)(2)(B) 
(1982). 

^^^See,  e.g.,  Etheredge,  The  World  of  Insurance:  What  Will  the  Future  Bring?,  Bus. 
&  Health,  Jan. /Feb.  1986,  at  5  (describes  growth  of  self -insurance);  Self  Insurers  Out- 
number Fully  Insured  Among  Larger  U.S.  Corporations,  Coalition  Rep.,  April  1985,  at 
1. 

"^5wr  see  Director  of  Bureau  of  Labor  Standards  v.  Fort  Halifax  Packing  Co.,  510 
A. 2d  1054  (Me.  1985),  prob.  Juris,  noted  sub.  nom  Fort  Halifax  Packing  Co.  v.  Coyne, 
107  S.  Ct.  430  (1986).  In  this  case,  Maine's  Supreme  Judicial  Court  held  that  because  a 
Maine  statute  requiring  severance  pay  was  only  operative  when  a  benefit  plan  was  not 
in  existence,  the  statute  did  not  "relate  to"  an  employee  benefit  plan  and  thus  was  not 
preempted  by  ERISA. 

^^'Pub.  L.  97-473,  §  302,  96  Stat.  2605  (1982)  (codified  at  29  U.S.C.  §  1144(b)(5) 
(1982)). 


908  INDIANA  LA  W  REVIEW  [Vol.  19:857 

dustries  where  many  companies  already  provide  no  insurance.  To  maintain 
insurance  incentives,  employers  could  be  allowed  to  deduct  from  the 
amount  of  payroll  tax  due  any  amounts  contributed  to  health  benefit 
plans  (insured  or  self-insured)  for  their  employees. 

Would  such  provisions  be  impermissible  regulation  under  ERISA? 
Perhaps  so.  Some  courts  have  interpreted  certain  state  plans  of  taxation 
as  prohibited  regulation  and  therefore  ruled  them  preempted  by  ERISA. 
For  example,  a  federal  district  court  in  Connecticut  found  a  statute  that 
imposed  a  2.75^^0  annual  tax  on  employee  benefit  plans  to  be  void  and 
unenforceable  because  of  ERISA  preemption  of  state  regulation. ^^^  More- 
over, in  protecting  Hawaii's  Prepaid  Health  Care  Act  in  1983,  Congress 
specifically  provided  that  Hawaii's  ERISA  exemption  did  not  affect  the 
status  of  "any  state  tax  law  relating  to  employee  benefit  plans. "^^^  Courts 
have  interpreted  this  language  to  indicate  that  Congress  intended  to 
preempt  all  state  tax  laws  insofar  as  they  relate  either  directly  or  indirectly 
to  employee  benefit  plans. ^"^^ 

Despite  these  rulings,  a  state  may  still  be  able  to  enact  a  payroll 
tax  with  deductions  for  health  coverage  such  as  the  one  outlined  above. 
The  rationale  behind  the  deduction  would  be  that  these  employers  are 
already  doing  their  part  toward  financing  health  care  by  providing  some 
reasonable  form  of  coverage.  The  legal  argument  runs  as  follows:  First, 
the  tax  is  analogous  to  a  state  corporate  income  tax  that  allows  deductions 
for  an  employer's  expenses  incurred  in  maintaining  employee  benefit 
plans.  Clearly,  such  state  income  taxes  with  such  deductions  have  not 
yet  been  found  to  "relate  to"  employee  benefit  plans  for  purposes  of 
ERISA  preemption.  A  payroll  tax  with  similar  offsets  should  be  afforded 
similar  status. 

Second,  such  a  payroll  tax  does  not  "relate  to"  employee  benefit 
plans  because  the  employer  is  taxed,  not  the  benefit  plan  itself.  Moreover, 
unlike  the  voided  Connecticut  statute,  the  amount  of  deduction  would 
not  discriminate  between  insured  and  self-insured  health  benefits — the 
very  distinction  ERISA  has  been  held  to  maintain.^^^  For  these  reasons. 


"^National  Carriers'  Conference  Comm,  v.  Heffernan,  454  F.  Supp.  914  (D.  Conn. 
1978).  Connecticut's  tax  on  premiums  received  by  insurance  companies  was  2%,  which 
meant  that  the  tax  structure  operated  as  an  incentive  to  use  traditional  insurance  rather 
than  ERISA-exempted  plans.  The  court  found  this  discrepancy  (2%  vs.  2.75%)  to  be 
"illustrative  of  the  potential  use  of  taxation  as  a  means  of  regulation."  Id.  at  917-18. 

^^^29  U.S.C.  §  1144(b)(5)(B)(i)  (1982). 

"^"^See,  e.g..  Northwest  Airlines,  Inc.  v.  Roemer,  603  F.  Supp.  7  (D.  Minn.  1984); 
General  Motors  Corp.  v.  California  State  Bd.  of  Equalization,  600  F.  Supp.  76  (CD. 
Cal.  1984).  See  Shaw  v.  Delta  Airlines,  Inc.,  463  U.S.  85  (1983);  Alessi  v.  Raybestos- 
Manhattan,  Inc.,  451  U.S.  504  (1981). 

^^'^See  supra  notes  271-72  and  accompanying  text.  Taxing  self-insurance  for  the  purpose 
of  funding  the  deficits  of  state  high-risk  pools  has  also  been  invalidated  on  ERISA  grounds. 
See  generally  Bovbjerg  &  Koller,  supra  note  211. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  909 

a  combination  payroll  tax  and  coverage  credit  may  not  be  considered 
as  regulating  employee  benefit  plans. 

Similarly,  states  are  also  free  to  tax  the  insurance-like  alternative 
plans  such  as  HMO's  and  PPO's;  again,  they  may  offset  charitable  care 
these  entities  provide.  Indeed,  to  some  extent,  states  already  do  so  through 
the  imposition  of  insurance  premium  taxes. 

The  calculation  of  such  taxes  as  well  as  set-offs  for  indigent  coverage 
or  care  involve  complex  administrative  questions.  Nevertheless,  such  taxes 
could  provide  a  useful  basis  for  funding,  and  could  equalize  the  burden 
imposed  on  competing  financing  and  delivery  alternatives — insurance 
companies,  self-insurers,  and  alternative  plans  like  HMO's  and  PPO's. 

Mandates  or  taxes  on  insurers,  on  medical  providers,  or  on  employers 
may  have  more  current  political  appeal  than  taxes  on  individual  taxpayers. 
Indirect  funding  through  mandates  for  individuals  to  insure  themselves 
is  another  '*off-budget"  option  for  states  to  consider.  It  would  be  foolish 
to  replace  efficient  group  purchasing  of  health  coverage  by  employers 
with  more  expensive  individual  policies;  however,  it  might  be  sensible 
to  fill  in  some  gaps  with  individual  mandates.  One  such  mechanism  is 
auto  insurance,  with  a  long  tradition  of  individual  requirements. ^^°  Au- 
tomobile owners  or  drivers  could  be  required  to  provide  evidence  of 
adequate  health  insurance  as  a  condition  of  Hcensure,  especially  to  cover 
the  very  large  bills  that  often  result  from  accidents  and  which  contribute 
disproportionately  to  uncompensated  care  in  hospitals. ^^' 

(ii.)  Private  revenue. — States  can  also  seek  to  attract  voluntary 
funding  from  individuals  themselves  (or  their  employers,  if  any)  by 
mandating,  or  themselves  running,  subsidized  insurance  plans  for  some 
of  the  uninsured.  The  basic  idea  here  is  to  encourage  insurance  coverage 
with  subsidies  while  holding  down  costs  with  private  contributions  to 
premiums.  This  strategy  presupposes  that  potential  eligibles  (or  their 
employers)  can  afford  to  make  a  contribution,  so  it  does  not  address 
the  impoverished  "hard  core"  of  the  uninsured.  The  approach  would 
nonetheless  address  two  groups  who  may  be  considered  medically  in- 
digent—the uninsured  working  poor  and  the  medically  uninsurable.  Public 
assistance  could  take  the  form  of  subsidizing  eligibles'  purchase  of  private 
coverage  with  cash,  vouchers,  or  tax  benefits;  alternatively,  governments 
could  create  publicly  underwritten  plans  or  insurance  pools  that  eligibles 
could  "buy  into"  at  below-market  rates. ^^  It  would  be  difficult,  but 


^^°See,  e.g.  Widiss,  Introduction:  Background  and  Perspective,  in  No-Fault  Auto- 
mobile Insurance  in  Action:  The  Experiences  in  Massachusetts,  Florida,  Delaware 
AND  Michigan  (A.  Widiss,  J.  Little,  R.  Clark  &  T.  Jones  eds.  1977). 

^^^See  supra  note  257  on  the  contribution  of  accidents. 

^^^Assistance  to  the  working  poor  could  readily  take  the  form  of  providing  a  tax 
credit  for  workplace  purchase  of  insurance,  which  would  assist  low  and  high  income 
workers  ahke,  rather  than  today's  tax  exclusion,  which  disproportionately  assists  upper- 


910  INDIANA  LAW  REVIEW  [Vol.  19:857 

perhaps  not  impossible,  to  structure  such  a  new  subsidy  to  aid  those 
at  high  risk  of  faiUng  to  insure  themselves,  without  having  to  subsidize 
too  many  otherwise  similar  people  who  already  have  coverage.  This 
approach  is  experimental  but  merits  close  attention. 

A  second  category  of  potential  eligibles  also  needs  pubhc  help  to 
obtain  coverage  but  can  contribute  themselves.  These  are  nonpoor  people 
otherwise  uninsurable  because  of  pre-existing  adverse  health  conditions. 
In  a  number  of  states,  state-run  comprehensive  insurance  risk  pools  help 
these  people  buy  standard  policies  at  a  surcharged  rate.^^^  The  pools 
help  a  small  fraction  of  even  the  uninsurable,  and  still  fewer  of  the 
uninsured  generally,  and  they  do  so  at  a  high  cost  because  even  the 
surcharged  premiums  must  be  subsidized  to  meet  high  medical  bills. 
Moreover,  as  now  run,  the  pools  do  not  help  the  indigent,  but  only 
those  with  the  wherewithal  to  pay  high  premiums  themselves.  Although 
states  may  move  toward  targeted  subsidies  to  help  the  low  income 
uninsurable,  high  risk  pools  will  provide  only  limited  general  help  to 
the  medically  indigent. 

4.  Administration. — Any  of  the  strategies  just  discussed  can  be 
implemented  with  varying  degrees  of  public  involvement.  An  entire  public 
system  can  be  created,  using  public  funds  and  employees.  Alternatively, 
government  may  specify  what  model(s)  are  desired  and  contract  with 
private  companies  to  administer  the  plan(s).  Or  government  may  help 
currently  uninsured  people  "buy  into"  existing  private  plans,  including 
those  run  privately  for  public  employees. ^^"^  Beneficiaries  may  be  required 
to  choose  among  multiple  alternatives,  e.g.,  HMO,  PPO,  private  fee- 
for-service  plan,  pubhc  fee-for-service  plan.  Any  of  these  alternatives 
may  be  funded  with  a  mix  of  public  and  private  revenues. 


bracket  taxpayers.  See  generally  Enthoven,  Health  Tax  Policy  Mismatch,  Health  Aff., 
Winter  1985,  at  5.  The  self  employed  could  also  be  given  tax  benefits  equivalent  to  those 
of  group  employees,  as  proposed  in  the  Improved  Access  to  Health  Care  Bill,  H.R. 
4742,  S.2402-S.2403,  99th  Cong.,  2d  Sess.  (1986).  Such  major  federal  tax  changes  seem 
unlikely,  given  that  comprehensive  reforms  have  just  been  legislated.  See  supra  note  48. 

^"See  supra  notes  11  &  26  for  description  of  uninsurables;  on  the  operation  of  state 
pools,  see  Bovbjerg  &  KoUer,  supra  note  211. 

^^"The  state  of  West  Virginia,  for  example,  has  a  unique  multi-employer  group  plan 
for  public  employees  that  already  covers  about  1  state  resident  in  8.  The  plan  began  at 
the  state  level,  then  expanded  to  cover  local  employees.  The  state  is  seeking  foundation 
funding  to  study  the  feasibility  of  opening  the  plan  to  small,  private  employers  as  well. 
Remarks  of  Robert  Chehig,  West  Virginia  Public  Employees  Insurance  Board,  at  Conference 
on  Facilitating  Health  Care  Coverage  for  the  Working  Uninsured:  Alternative  Strategies, 
Center  for  Policy  Research,  National  Governors'  Association,  in  Rosemont,  Illinois  (De- 
cember 16,  1986).  The  two  main  implementation  problems  are  how  to  prevent  free-riding 
by  small  employers  who  would  have  bought  coverage  anyway  and  how  to  prevent  adverse 
selection  by  high-utilizing  new  enrollees  that  would  drive  up  the  cost  of  the  plan  for  all 
participants.  Some  judgmental  underwriting  (exclusion  of  bad  risks)  appears  to  be  required. 
On  the  problems  of  pooling  small  groups,  see  generally  Bovbjerg,  supra  note  24. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  911 

The  State  of  Arizona,  for  example,  has  brought  a  number  of  these 
different  methods  together  in  the  Arizona  Health  Care  Cost  Containment 
System. ^^^  AHCCCS,  as  it  is  known,  is  a  comprehensive  program  of 
medical  services  provided  to  the  medically  indigent  on  a  prepaid  basis. 
Arizona  runs  the  program  with  federal  financial  participation  in  lieu  of 
conventional  Medicaid.  The  program  is  privately  administered  under  a 
state  contract  set  by  competitive  bidding.  The  private  contractor  in  turn 
contracts  with  local  health  plans  for  the  provision  of  care,  again  on  a 
prepaid  basis  through  competitive  bidding.  HMO's,  PPO's,  and  others 
are  eligible  to  bid  if  they  provide  the  requisite  services  in  the  designated 
areas.  All  providers  are  required  to  use  primary  care  gatekeepers. 

Currently,  AHCCCS  is  being  run  as  a  demonstration  project  with 
federal  Medicaid  waiver  authority,  and  results  are  not  complete.  The 
results  on  quality  and  access  are  not  yet  in,  and  there  is  some  concern 
that  people  are  not  being  well  enough  served. ^^^  However,  the  state  itself 
is  encouraged  that  it  is  delivering  good  quality  care  to  a  broad  section 
of  the  medically  indigent  at  a  price  less  than  that  which  prevails  for 
Medicaid  in  somewhat  comparable  sunbelt  states. ^^^  The  state  plans  to 
expand  AHCCCS  to  include  non-Medicaid  ehgibles,  including  the  working 
poor.  This  approach  would  mix  public  and  private  roles  both  in  funding 
and  in  administration. 

Numerous  other  initiatives  incorporating  these  economizing  ideas  are 
under  way  at  the  state  and  local  level,  mainly  initiated  by  public  or 
quasi-public  entities.  The  Robert  Wood  Johnson  Foundation  has  sought 
to  stimulate  such  trials  with  technical  assistance  and  modest  "seed 
money.  "^^^ 

As  a  matter  of  public  administration,  the  need  to  implement  controls 
over  medical  spending  points  toward  local  control  because  most  medical 
markets  are  local.  It  is  difficult  to  relate  individually  to  providers  or 
patients  from  a  distance.  Moreover,  integrating  new  medical  assistance 
with  public  hospital  care  might  also  occur  more  readily  at  a  local  level. 
Public  "tastes"  in  welfare  spending  also  vary  considerably  from  place 
to  place,  certainly  among  states,  and  even  within  them.  Some  areas  are 
well  known  for  high  taxes  and  high  benefits,  while  other  areas  are  known 
for  the  opposite. 

Local  control  would  also  result  in  more  experimentation  than  a 
national  or  even  a  state  approach,  assuming  that  the  responsible  localities 

^^^E.g.,  J.  Christianson  &  D,  Hillman,  supra  note  204. 

^*^Kirkman-Liff,  Refusal  of  Care:  Evidence  from  Arizona,  Health  Aff.,  Winter  1985, 
at  15. 

^*^D.  ScHALLER,  Arizona  Health  Care  Cost  Containment  System:  Annual  Report, 
July  1984- June  1985,  at  91-118  (March  1986). 

^^^RoBERT  Wood  Johnson  Foundation,  Health  Care  for  the  Uninsured  Program 
(1985)  (grant  solicitation  materials). 

^^'^See  generally  P.  Fox,  W.  Goldbeck  &  J.  Spies,  supra  note  22. 


912  INDIANA  LA  W  REVIEW  [Vol.  19:857 

are  large  enough  to  support  professional  management.  It  is  no  accident 
that  changes  in  private-sector  health  insurance  occur  market  area  by 
market  area,  through  new  entry  by  HMO's  and  PPO's  and  aggressive 
benefits  management  by  large  employers,  third-party  administrators,  and 
business  coalitions. ^^^  On  the  other  hand,  medical  indigence  is  greatly 
affected  by  state-level  decisions  on  welfare,  Medicaid,  hospital  Ucensure, 
and  insurance  regulation,  as  well  as  by  federal  ERISA,  Medicaid,  and 
Medicare  rules.  Moreover,  the  ability  of  jurisdictions  to  raise  revenues 
varies,  so  a  broader  approach  also  makes  sense. 

Given  the  current  administration's  attitude,  the  federal  government 
appears  to  be  out  of  the  funding  picture,  although  federal  legislation 
continues  to  seek  state  and  private  solutions.  For  example,  bills  apparently 
to  be  reintroduced  in  the  100th  Congress  would  require  subsidized  state 
high-risk  pools,  as  well  as  revenue  pooling  for  essential  hospital  care 
on  behalf  of  those  who  cannot  pay.^^°  In  any  event,  the  short-term 
political  reality,  along  with  tradition  and  legal  theory,  suggest  that 
combined  state-local  programs  will  be  the  dominant  approach  in  the 
future  as  in  the  past.^^'  Such  approaches  can  combine  state  strengths  in 
financing,  pooling,  regulation,  and  managerial  expertise  (available  directly 
or  through  technical  assistance  to  localities)  with  local  virtues  of  provider 
and  patient  relations  and  flexible  tailoring  of  programs  to  local  desires 
and  needs. 

V.    Affording  Decent  Coverage  for  the  Medically  Indigent 

Conventional  medical  care  is  expensive,  as  is  the  insurance  needed 
to  cover  it.  One  reason  that  it  costs  so  much  is  the  widespread  belief 
that  only  the  best  will  suffice  (especially  when  care  is  heavily  insured). 
Such  attitudes  seem  to  be  changing,  and  certain  economizing  measures 
have  become  acceptable. ^^^  However,  no  * 'magic  bullets"  exist  that  can 
make  the  same  conventional  care  or  coverage  affordable  for  all  without 
considerable  pubhc  subsidy  or  coercion. ^^^  Even  with  new  economies, 
additional  efforts  to  help  the  medically  indigent  will  cost  more  than  the 
current  patchwork  of  assistance  through  Medicaid,  public  hospitals,  reg- 
ulatory requirements,  and  private  charity,  and  society  seems  unwilling 
to  contribute  enough  money,  individually  or  collectively.^^"* 


^^In  the  99th  Congress,  these  bills  were  S.2402,  S.2403,  and  H.R.  4742,  The  Access 
to  Health  Care  Act;  see  also  supra  notes  63  &  282. 

^^'See  discussion  of  existing  programs,  supra  notes  132-213  and  accompanying  text. 

^'^The  "buyers'  revolution"  in  health  financing  has  necessitated  the  acceptance  of 
hmits  on  insurance  coverage  and  on  patients'  and  medical  providers'  discretion  to  order 
ever  more  and  more  expensive  health  care.  See,  e.g.,  J.  Califano,  supra  note  22. 

^"^^See  Bovbjerg,  supra  note  24,  at  416  (same  conclusion,  for  private  coverage,  vol- 
untarily purchased). 

^^'The  most  obvious  demonstration  of  unwillingness  to  pay  for  medical  indigents  is 
states'  reluctance  to  expand  Medicaid  to  cover  as  many  medical  indigents  as  that  program 


1986]  CARE  FOR  MEDICALLY  INDIGENT  913 

Improvements  seem  to  require  one  or  both  of  two  interrelated  de- 
velopments—greater willingness  to  pay  or  increased  acceptance  of  new 
health  '^products"  that  offer  lower  but  still  decent  levels  of  protection 
that  people  will  be  wiUing  to  finance.  One  major  obstacle  impedes  both 
developments — professional  and  political  desires  (and  legal  expectations) 
for  high  quality  medicine  within  a  so-called  single-tier  system  of  health 
care  for  all,  even  the  medically  indigent. 

With  regard  to  willingness  to  pay,  several  trends  offer  some  en- 
couragement: 

(1)  More  information  about  the  plight  of  uninsured  indigents 
should  increase  willingness  to  help  them. 

(2)  Ordinary,  middle-class  people  are  increasingly  at  risk  of 
medical  indigency — because  many  have  lost  well-insured  jobs,  because 
many  are  beginning  to  work  in  small,  less-insured  workplaces,  because 
high  medical  spending  can  exceed  what  was  once  a  reasonable  extent  of 
coverage,  and  because  more  people  are  developing  adverse  medical  histories 
that  hamper  obtaining  insurance.  Funding  an  adequate  social  safety  net 
should  appeal  to  those  concerned  about  these  risks. 

(3)  Finally,  new  mechanisms  are  being  found  to  control  medical 
spending, ^^^  offering  the  eventual  prospect  that  a  politically  attractive, 
streamlined  '^product"  will  indeed  emerge. 

New  products,  the  second  needed  development,  must  be  able  to 
implement  sensible  restrictions  on  the  amount  of  care  available  and  the 
prices  paid  in  order  to  maximize  the  number  of  people  who  can  be 
covered,  even  if  this  means  somewhat  more  restricted  access  to  less 
elaborate  care.  For  those  who  now  have  no  protection  at  all,  some  care 
is  better  than  none.  Indeed,  existing  medically  indigent  programs  are 
experimenting  with  restricting  access  to  providers,  as  are  many  middle- 
class  plans. 

Likewise,  strong  utilization  control  over  the  services  delivered  seems 
reasonable,  and  it  may  prove  appropriate  to  insist  on  less  expensive, 
nontraditional  providers  to  cover  certain  services.  It  definitely  makes 
sense  to  keep  people  out  of  the  hospital  wherever  possible.  Something 
Hke  the  Arizona  AHCCCS  program,  perhaps  with  even  a  lesser  package 
of  benefits,  may  be  appropriate  depending  on  the  local  situation.  Of 
course,  any  restrictions  on  providers  or  coverage  can  prove  difficult  to 
implement.  Further  experimentation  is  needed  here. 

This  ongoing  search  for  a  decent,  even  if  bare-bones,  level  of  coverage 
is  significantly  hampered  by  ethical,  professional,  and  legal  reluctance 
to  allow  lower  levels.  Anything  less  than  equal  care  for  all  is  often 
castigated  as  '^rationing"  or  unethical  * 'second  class"  care.  It  faces  legal 
impediments  as  well. 

will  reach,  even  though  the  federal  government  pays  half  or  more  of  the  cost.  See  supra 
notes  236-39  and  accompanying  text. 

^'^^See  supra  notes  240-54  and  accompanying  text. 


914  INDIANA  LAW  REVIEW  [Vol.  19:857 

All  the  permutations  of  ethical-professional  concern  cannot  be  suc- 
cessfully addressed  here.  In  brief,  insisting  on  single-tier  medicine  for 
all  in  practice  means  eliminating  any  assistance  for  many  of  the  least 
fortunate,  because  currently  society  demonstrably  will  not  provide  un- 
limited funds.  Perfection  is  the  enemy  of  the  good  here,  even  in  the 
opponents'  own  ethical  frame  of  reference. ^^^  Society  accepts  dual  stan- 
dards for  other  charity,  whether  pubhc  or  private  charity,  even  with 
regard  to  fundamental  needs  like  food,  housing,  and  clothing;  why  not 
in  medical  care?^^^  Moreover,  although  today  many  politicians  and  prov- 
iders pay  lip  service  to  the  notion  of  * 'nothing  but  the  best"  for  all, 
the  reality  differs.  There  are  different  delivery  systems  for  the  insured 
middle  class,  for  veterans,  for  Indians,  and  for  people  using  public 
hospitals.  Accepting  different  programs  for  the  medically  indigent  does 
not  seem  unthinkable. ^^^  Certainly,  Medicaid  pays  less  for  physicians 
than  do  private  insurance  programs  and  thus  buys  much  lower  access 
for  Medicaid  patients.  Yet,  even  with  Medicaid,  those  within  the  eligible 
categories  are  clearly  better  off  than  non-eligibles  in  otherwise  similar 
economic  circumstances. 

On  a  more  philosophical  level,  it  is  notable  that  opponents  seem  to 
like  to  invoke  the  spectre  of  " rationing "^^^  because  it  connotes  denying 
people  something  to  which  they  are  entitled  and  could  get,  absent  a 
meddling  government. ^^^  However,  labeling  lower  but  decent  care  or 
coverage  "rationing"  is  conceptually  misleading  and  politically  unhelpful. 
In  the  case  of  indigent  medical  care  or  coverage,  the  real  argument 
concerns  the  nature  and  level  of  any  entitlement;  the  "rationing"  no- 


^^^As  argued  by  one  respected  academic  and  advocate  of  public  health  programs: 
"[F]inally,  the  argument  is  advanced  that  special  programs  for  poor  people  are  fated  to 
become  poor  programs — always  the  first  for  recissions.  That  argument  has  served  too 
long  as  the  refuge  for  neglecting  poor  people  altogether."  Miller,  The  Role  of  Health 
Planning  in  the  Provision  of  Complex  and  Not-So-Complex  Services,  in  The  Role  of 
Health  Planning  in  the  Competitive  Era  43  (F.  Sloan,  J.  Blumstein  &  J.  Perrin  eds. 
forthcoming  1987). 

2'Tor  example,  although  it  needs  to  be  safe  and  fit  for  habitation,  public  housing 
need  not  supply  middle  class  space  or  amenities.  Food  stamps  cover  a  minimal  diet  at 
best,  and  no  specific  allowance  at  all  is  made  for  clothing.  With  regard  to  private  charity, 
people  seem  to  donate  used  clothing  rather  than  new,  and  soup  kitchens  hardly  offer 
cuisine  competitive  with  many  restaurants.  It  is  true  that  some  health  care  more  immediately 
involves  hfe  and  death  than  do  food  or  housing,  but  access  to  true  emergency  care  is 
not  what  needs  to  be  Hmited.  See  also  supra  note  67. 

^^^Compare,  e.g.,  Rosenblatt,  Rationing  'Normal'  Health  Care:  The  Hidden  Legal 
Issues,  59  Texas  L.  Rev.  1401  (1981)  with  Blumstein,  Rationing  Medical  Resources:  A 
Constitutional,  Legal,  and  Policy  Analysis,  59  Texas  L.  Rev.  1345  (1981). 

^^hus,  for  instance,  gasoline  rationing  means  queues  for  all,  not  merely  for  the 
poor.  Cf  Bovbjerg  &  Held,  supra  note  233  (prefer  "resource  allocation"  to  "rationing" 
as  descriptive  term).  "Rationing"  as  a  term  makes  more  sense  if  read  in  its  older  meaning 
of  "offering  limited  quantities"  (as  in  sailors'  "rations"  of  rum),  but  the  usual  connotation 
of  the  expression  is  wholly  different. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  915 

menclature  merely  assumes  entitlement  to  full  equality  without  dem- 
onstrating it  or  convincing  taxpayers  or  others  to  fund  it. 

Hence,  there  are  both  practical  and  theoretical  reasons  for  accepting 
separate  programs  for  the  poor.  Beyond  the  ethical-political  arguments 
He  practical  legal  problems.  The  law  also  contemplates  equality  of  care 
for  all,  at  least  in  that  where  care  is  provided,  the  same  malpractice 
^'standard  of  care"  applies  regardless  of  the  patient's  ability  to  pay.^^° 
Thus,  where  care  is  limited  and  a  bad  outcome  occurs,  providers  (and 
insurers,  as  well)  face  possible  liabihty.^^*  In  practice,  legal  exposure 
may  reduce  coverage  because  providers  and  funding  jurisdictions  may 
prefer  to  offer  no  nonemergency  service  rather  than  limited  service  or 
coverage  with  a  liability  risk. 

How  might  liability  rules  protect  the  medically  indigent  without 
threatening  willingness  to  help  serve  them  at  an  affordable  price?  Prec- 
edents are  not  encouraging.  Under  malpractice  law,  a  ''reasonable  mi- 
nority" of  practitioners  may  practice  differently  from  the  mainstream, ^^^ 
but  the  rule  is  grounded  mainly  in  medical  uncertainty,  not  differences 
in  patients'  ability  to  pay.  The  traditional  locality  rule,  although  now 
much  eroded,  is  a  second  possibility. ^^^  The  rule  recognized  local  variation 
in  the  extent  of  medical  talent  and  resources  available.  Some  cases 
similarly  hold  it  unnecessary  for  outlying  hospitals  to  have  the  latest 
equipment  available. ^^"^  Such  cases,  however,  focus  on  geographic  rather 
than  economic  differences.  More  to  the  point  is  the  distinction  between 
specialists  and  general  practitioners;  specialists  have  a  higher  standard 
because  they  hold  themselves  out  to  patients  as  being  more  qualified 
(and,  presumably,  charge  more  as  a  result). ^°^  Public  coverage  that  held 
itself  out  as  only  a  decent  minimum  might  seem  analogous,  but  indigent 
patients  have  no  real  alternative,  so  the  rationale  is  not  really  comparable. 

Another  relevant  line  of  legal  thinking — now  quite  academic  and 
somewhat  heretical — holds  that  malpractice  law  should  govern  only  in 
the  absence  of  contractual  agreements  specifying  desired  care  (and  dispute 
resolution  procedures). ^'^^  This  approach  suggests  that  different  people 


^°°See  supra  notes  97-98,  107-08  and  accompanying  text.  Cf.  Atiyah,  Medical  Mal- 
practice and  the  Contract /Tort  Boundary,  49  Law  &  Contemp.  Probs.  287,  292-98  (Spring 
1986)  (desire  for  egalitarianism  a  reason  for  tort,  not  contract,  to  govern  malpractice). 

'°'See,  e.g.,  Wickline  v.  State,  183  Cai.  App.  3d  1175,  228  Cal.  Rptr.  661,  rev. 
granted,  231  Cal.  Rptr.  560,  727  P.2d  753  (1986)  (issue  of  liability  for  bad  outcome  after 
hospital  stay  cut  short  under  third-party  coverage  rules). 

^°'^E.g.  A.  Holder,  supra  note  97,  at  55-57. 

^°^E.g.,  Comment,  Standard  of  Care  for  Medical  Practitioners — Abandonment  of  the 
Locality  Rule,  60  Ky.  L.J.  209  (1971). 

"^E.g.,  Pederson  v.  Dumouchel,  72  Wash.  2d  73,  431  P.2d  973  (1967). 

^"^Naccarato  v.  Grob,  384  Mich.  248,  180  N.W.2d  788  (1970). 

^°^E.g.,  Havighurst,  Private  Reform  of  Tort  Law  Dogma:  Market  Opportunities  and 
Legal  Obstacles,  49  Law  &  Contemp.  Probs.  143  (Spring  1986). 


916  INDIANA  LAW  REVIEW  [Vol.  19:857 

can  choose  different  levels  of  care  for  themselves.  It  could  be  argued 
that  public  beneficiaries  had  voluntarily  accepted  the  restrictions  in  the 
program,  so  long  as  those  restrictions  were  fully  disclosed.  However, 
this  approach  is  not  fully  developed  as  a  conceptual  matter,  much  less 
as  an  accepted  rule  of  law,  and  its  relevance  to  poor  people  with  few 
real  choices  is  questionable. ^°^ 

Perhaps  the  very  notion  that  malpractice  law  should  set  the  standard 
of  care,  in  the  sense  of  what  care  should  be  given,  is  over-broad.  Partly 
through  an  unfortunate  linguistic  coincidence,  the  legal  standard  of 
"care,"  which  originally  meant  the  degree  of  carefulness  required  to  be 
non-negligent,  has  come  to  mean  also  what  services  themselves  are 
appropriate.  Some  rethinking  seems  called  for  here.  The  fact  that  a 
given  insurance  program  or  a  given  provider  simply  does  not  cover  long- 
term  care,  mental  health,  or  transplants — or  for  that  matter,  certain 
hospitalizations  or  hospitals — does  not  seem  to  be  a  failure  of  "care." 
It  seems  rather  a  personal  or  social  judgment  about  the  appropriate  use 
of  limited  resources. 

Malpractice  rules  and  judicial  process  seem  better  suited  to  deter- 
mining whether  a  technical  mistake  or  oversight  occurred  than  to  deciding 
broader  coverage  issues.  Thus,  one  solution  to  the  problem  might  be 
to  establish  a  program  that  defines  and  is  limited  to  specific  medical 
services  and  gives  malpractice  immunity  to  those  who  carefully  provide 
those  services.  Whether  the  jurisdiction(s)  establishing  such  a  program 
can  immunize  themselves  is  another  question. 

VI.     Conclusion 

The  main  problem  for  the  medically  indigent  is  that  they  do  not 
have  enough  money.  And  the  main  problem  with  health  coverage  for 
the  indigent  is  that  neither  they  themselves,  their  employers,  nor  their 
government(s)  have  bought  them  adequate  protection.  Medical  providers 
have  limited  ability  to  provide  charity  care.  Consequently,  the  medically 
indigent  are  disadvantaged  in  their  access  to  medical  care. 

This  Article  has  discussed  various  ways  of  organizing  and  financing 
coverage  or  care  for  the  medically  indigent.  More  public  and  private 
resources  must  be  raised  through  some  combination  of  taxation,  regu- 
lation, and  increased  voluntary  payment.  The  effort  needed  for  even 
medium-level  assistance  is  significant,  perhaps  $15-20  billion  in  the  first 
year,  or  as  much  as  states  already  spend  on  Medicaid. 

If  society  in  its  various  components  is  not  wiUing  to  fund  universal 
coverage  of  a  conventional  kind — and  it  currently  is  not — then  society 
must  settle  for  less,  but  in  a  constructive  fashion.  It  must  define  a  lesser 
but  decent  health  "product,"  preferably  in  a  subsidized,  insurance-hke 

^°'Atiyah,  supra  note  300. 


1986]  CARE  FOR  MEDICALLY  INDIGENT  917 

form  that  offers  beneficiaries  choice  among  competing  providers.  Prov- 
iders who  participate  in  improving  care  for  the  indigent  deserve  praise, 
not  malpractice  suits  for  dehvering  only  the  care  that  is  covered.  They 
should  receive  protection  from  tort  claims  of  misfeasance  when  they 
have  in  fact  carefully  complied  with  social  norms  of  adequacy  as  reflected 
in  coverage  rules. 

The  need  is  urgent  and  the  time  to  begin  is  now.  It  is  better  to 
start  with  a  reasonable  minimum,  with  the  hope  of  later  expansion,  than 
to  hold  out  for  optimal  plans  that  may  never  come  to  pass.  Further 
arguing  about  "rationing"  of  care  to  the  poor  or  the  ethics  of  "two- 
tier"  medicine  merely  postpones  difficult  coverage  decisions,  to  the  clear 
disadvantage  of  the  medically  indigent. 


state  Hospital  Cost  Containment:  An  Analysis  of 
Legislative  Initiatives 

Carl  J.  Schramm* 

As  a  result  of  the  success  of  various  state  efforts  at  containing 
hospital  cost  inflation  and  the  encouragement  such  efforts  have  received 
in  recent  federal  legislation  directed  at  reducing  Medicare  costs, ^  a  second 
wave  of  state  initiatives  directed  at  regulating  hospital  revenues  appears 
to  be  breaking  out  in  legislatures  across  the  land.  In  1983,  three  states 
enacted  mandatory  hospital  rate-setting  legislation.^  In  1984,  at  least  ten 
legislatures  considered  similar  proposals.  It  has  been  suggested  that  in 
the  next  few  years  over  half  of  the  states  will  have  adopted  such 
measures.^ 

Observation  of  several  recent  legislative  campaigns  suggests  an  in- 
teresting similarity  of  parties,  interests,  tactics,  arguments,  and  outcomes 
common  to  such  efforts.  Unlike  many  areas  of  public  action  where  a 
small  number  of  interests  are  contesting  for  resource  control,  any  change 
involving  hospitals  has  an  immediate  impact  on  a  large  number  of  groups. 
This  Article  attempts  to  identify  the  parties  interested  in  state  efforts 
to  reform  hospital  financing  mechanisms.  It  also  describes  the  likely 
arguments  and  positions  of  each  party,  the  dynamics  of  the  various 
legislative  tactics,  and  the  probable  outcomes. 

This  analysis  is  based  on  the  author's  experience  and  observations 
from  1980  to  1985  in  eighteen  states  where  hospital  rate  setting  has  been 
either:  1)  successfully  established  by  legislation,  2)  enacted  but  not  given 
hfe  as  an  operating  program,  3)  considered  by  the  legislature  but  not 
enacted,  or  4)  the  focus  of  formal  study  by  a  gubernatorial  or  legislative 
task  force  or  work  group. '^  Because  hospital  rate  setting  has  been  the 


*Director,  John  Hopkins  Center  for  Hospital  Finance  and  Management;  Lecturer, 
University  of  Maryland  School  of  Law;  Former  Vice  Chairman,  Maryland  Health  Services 
Cost  Review  Commission.  Ph.D.,  University  of  Wisconsin,  1973;  J.D.,  Georgetown  Univer- 
sity Law  Center,   1978. 

'Social  Security  Amendments  of  1983,  Pub.  L.  No.  98-21,  tit.  VI,  §§  601  et  seq., 
97  Stat.  65  (codified  as  amended  at  42  U.S.C.  §§  1395ww(b),  (d)  (1982  &  Supp.  1985)). 

The  three  states  were:  Maine,  Me.  Rev.  Stat.  Ann.  tit.  22,  §  381  (West  Supp. 
1986);  Maryland,  Md.  Health  Gen.  Code  Ann.  §  19-209  (Supp.  1986);  and  Wisconsin, 
Wis.  Stat.  Ann.  §§  54.01  et  seq.  (West  Supp.  1986). 

^See  generally  Intergovernmental  Health  Policy  Project,  State  Health  Notes  (D. 
Merritt  ed.  March  1985). 

*See  Am.  Hosp.  Ass'n,  State  Rate-Setting  Legislation:  Legal  Issues  in  the 
negotla.tion  and  implementation  of  a  statute  (1984);  intergovernmental  health 
Policy  Project,  The  Status  of  Major  State  Policies  Affecting  Hospital  Capital 
Investment  (1984);  Nat'l  Conference  of  State  Legislatures,  Health  Care  Cost  Con- 
tainment Legislation:  1983  Legislative  Update  Fifty  States  (1983);  Nat'l  Conference 
of  State  Legislatures,  1984  State  Health  Care  Cost  Containment  Legislation  (1984); 

919 


920  INDIANA  LAW  REVIEW  [Vol.  19:919 

object  of  legislative  action  or  governmental  study  in  approximately  twenty- 
three  states,^  the  experience  reported  here,  while  representative,  is  not 
comprehensive. 

I.     Background  on  State  Legislation 

A.     Forces  for  Reform 

It  is  clear  that  the  nation  is  struggling  with  the  problem  of  unac- 
ceptable hospital  costs.  Evidence  suggests  that  the  health  care  delivery 
system  is  operating  inefficiently.^  Since  the  passage  of  the  Medicare 
diagnostic-payment  system  in  1983,^  falling  hospital  occupancy  through- 
out the  nation  suggests  that  hospitals  have  in  fact  been  overutilized.^ 
Moreover,  the  large  increase  in  the  number  of  physicians  entering  the 
system^  and  the  increasing  age  of  the  population'^  add  a  sense  of  urgency 
to  the  search  for  some  means  of  reducing,  or  at  least  holding  in  check, 
the  growth  of  the  health  care  enterprise.  Largely  because  hospitals  are 
the  most  visible  entity  in  the  delivery  system  and  have  had  the  fastest 
relative  increase  in  unit  prices  and  absolute  budgets, '^  they  have  been 
singled  out  as  the  object  of  public  and  private  policy  aimed  at  reducing 
overall  health  expenditures. 

Partly  as  a  response  to  the  entry  of  government  as  a  significant 


Schramm,  Wren  &  Biles,  Controlling  Hospital  Cost  Inflation:  New  Perspectives  on  State 
Rate  Setting,  5  Health  Aff.  22,  23  (1986). 

^See  supra  note  4  and  accompanying  text.  Previous  model  state  hospital  legislation 
has  been  the  basis  for  several  legislative  proposals  and  underlies  the  recently  enacted  West 
Virginia  legislation.  Schramm,  A  State-Based  Approach  to  Hospital  Cost  Containment, 
18  Harv.  J.  ON  Legis.  603,  658-78  (1981). 

^See,  e.g.,  Dep't  of  Health  &  Human  Services,  Hospital  Prospective  Payment 
FOR  Medicare:  Report  to  Congress  Required  by  the  Tax  Equity  and  Fiscal  Re- 
sponsibility Act  of  1982  i-iii  (1982);  Dep't  of  Health  &  Human  Services,  Office  of 
Ass't  Secretary  for  Planning  &  Evaluation,  Hospital  Capital  Expenses,  A  Medicare 
Payment  Strategy  for  the  Future:  Report  to  Congress  1-33  (1986);  Prospective 
Payment  Assessment  Comm'n,  Medicare  Prospective  Payment  and  the  American 
Health  Care  System:  Report  to  the  Congress  9-11  (1986)  [hereinafter  ProPAC  Report 
ON  the  American  Health  Care  System]. 

'Social  Security  Amendments  of  1983,  Pub.  L.  No.  98-21,  tit.  VI,  §§  601  et  seq., 
97  Stat.  65  (codified  as  amended  at  42  U.S.C.  §  1395ww(d)  (1982  &  Supp.  1985)). 

*ProPAC  Report  on  the  American  Health  Care  System,  supra  note  6,  at  19- 
20. 

^See  generally  The  Coming  Physician  Surplus  (E.  Ginzberg  &  M.  Ostow  eds. 
1984). 

^°See  generally  Fuchs,  "Though  Much  is  Taken":  Reflections  on  Aging,  Health,  and 
Medical  Care,  62  Milbank  Mem.  Fund  Q.   143  (1984). 

"Gornik,  Greenberg,  Eggers  &  Dobson,  Twenty  Years  of  Medicare  and  Medicaid: 
Covered  Populations,  Use  of  Benefits,  and  Program  Expenditures,  Health  Care  Fin. 
Rev.  13,  43  (Supp.  1985)  [hereinafter  Twenty  Years  of  Medicare  and  Medicaid]. 


1986]  COST  CONTAINMENT  921 

payer  of  health  care  costs  through  Medicare  and  Medicaid,  hospital 
prices  have  grown  at  a  rate  outstripping  that  of  all  other  goods  and 
services  in  the  economy.'^  Consequently,  it  is  not  surprising  that  gov- 
ernment has  been  the  most  active  party  attempting  to  reduce  overall 
hospital  cost  inflation.  Government  interest  is  founded  on  two  bases: 
government  is  attempting  to  react  to  the  complaints  of  citizens  about 
a  poHtically  sensitive  issue,  and  government,  as  a  payer  itself  through 
Medicare  and  Medicaid,  is  directly  affected  in  its  own  budgets  by  cost 
inflation  in  hospital  services. 

Governmental  approaches  to  the  problem  of  inflation  in  certain 
markets  can  generally  be  characterized  as  regulatory  in  nature,  i.e.,  a 
public  agency  typically  becomes  the  mechanism  by  which  prices  are 
determined.'^  However,  in  the  case  of  hospital  costs,  government  has 
actively  sought  non-regulatory  answers  as  well,  including  the  establishment 
of  alternative  providers  of  care  such  as  health  maintenance  organizations 
(HMO's)  and  the  encouragement  of  financing  mechanisms  that  result  in 
more  rational  economic  choices  by  consumers.  The  latter  approach  stim- 
ulates insurers  to  increase  the  presence  of  coinsurance  and  deductibles 
and  to  pay  for  second  opinions  in  order  to  reduce  the  incidence  of 
unnecessary  surgery.  •'* 

Recently,  however,  concern  with  reducing  costs  in  health  and  hospital 
care  has  grown  so  widespread  that  a  larger  number  of  private  parties 
have  taken  an  active  role  in  influencing  hospital  prices.  These  include 
employers,  unions,  and  health  insurance  companies.  In  response,  prov- 
iders, including  hospitals  and  physicians,  have  unsuccessfully  attempted 
voluntary  price  restraint  as  one  possible  solution.'^ 

While  there  is  widespread  concern  that  hospital  prices  are  rising  too 
rapidly,  few  agree  on  how  the  problem  should  be  attacked.  However, 
several  goals  seem  to  be  uniform  objectives.  The  first  is  reducing  the 
rate  of  increase  in  hospital  cost  inflation.'^  This  has  been  the  most 
widely  accepted  policy  objective,  largely  because  hospital  prices  have 
been  rising  faster  than  prices  for  other  goods  and  services.'^ 

In  more  recent  years  a  second  goal  has  become  important,  namely, 
reducing  absolute  levels  of  spending  on  health  care.  This  objective  began 


^^See,  e.g.,  Levits,  Lazenby,  Waldo  &  Davidoff,  National  Health  Expenditures,  1984, 
Health  Care  Fin.  Rev.,  Fall  1984,  at  1,  8  [hereinafter  National  Health  Expenditures, 
1984];  Prospective  Payment  Assessment  Comm'n,  Report  and  Recommendations  to 
THE  Secretary  12-13  (1985)  [hereinafter  ProPAC  Report  to  the  Secretary,  1985]. 

^^See  generally  S.  Breyer,  Regulation  and  Its  Reform  15-35  (1982). 

^*See  ProPAC  Report  to  the  Secretary,  1985,  supra  note  12,  at  13. 

^^See,  e.g..  Am.  Hosp.  Ass'n,  1978-79  Goals  of  the  Voluntary  Effort  (1979). 

'^Biles,  Schramm  &  Atkinson,  Hospital  Cost  Inflation  Under  State  Rate-Setting 
Programs,  303  N.  Eng.  J.  Med.  663  (1980). 

"Twenty  Years  of  Medicare  and  Medicaid,  supra  note  11,  at  16-17. 


922  INDIANA  LAW  REVIEW  [Vol.  19:919 

to  emerge  with  the  recession  of  the  early  1980's  and  with  the  immense 
growth  of  the  federal  deficit.'^  Related  to  reducing  absolute  levels  of 
spending  is  the  goal  of  reducing  per  capita  spending  on  health  care.*^ 
The  emergence  of  these  goals  suggests  that  merely  to  reduce  the  rate 
of  change  in  hospital  prices,  or  to  cut  back  levels  of  spending,  is  to 
avoid  the  issue  of  the  drift  of  real  wealth  into  the  health  care  sector 
from  other  areas  of  social  enterprise.  The  twofold  growth  of  GNP  shares 
consumed  by  the  health  sector  in  the  post-Medicare  era  is  evidence  that 
wealth  drift  is  the  operative  issue  of  concern. ^° 

Therefore,  the  objective  of  those  concerned  over  rising  health  care 
costs  is  some  effective  solution  to  the  problem.  While  many  have  argued 
that  competitive  or  market-based  solutions  offer  the  best  hope  of  reducing 
the  health  care  cost  problem^' — and,  to  be  sure,  increased  competition 
in  health  care  markets  in  the  next  few  years  will  be  observed  —  others 
believe  it  is  inevitable  that  government  will  be  the  prime  mover  in 
restructuring  the  reimbursement  system. ^^  Government  may  act  to  reduce 
its  own  budget  exposure  and  it  may  act  for  broader  motives  such  as 
ensuring  an  orderly  and  politically  acceptable  allocation  system. 

B.     The  Road  to  Legislation — Four  Premises  of  State 

Regulation 

The  first  premise  of  government  efforts  to  reduce  costs  is  that 
legislative  intervention  and  guidance  are  necessary  if  any  system-wide 
change  is  to  come  about.  For  over  a  decade,  hospital  costs  have  been 
termed  a  serious,  even  critical,  problem  by  many  private  interests.  How- 
ever, until  very  recently,  there  has  been  no  evidence  of  any  consensus, 
let  alone  action,  among  private  sector  actors.  While  there  are  increasing 
signs  that  some  employers  have  taken  an  active  interest  in  reducing 
health  care  costs, ^^  it  seems  hkely  that  government  action  will  be  necessary 


'^The  deficit  in  the  federal  budget  increased  from  $59.6  billion  in  fiscal  year  1980 
to  an  estimated  $207.7  billion  in  fiscal  year  1983.  Office  of  Management  &  Budget, 
Fiscal  Year  1982,  Budget  Revisions,  March  1981,  at  11;  Office  of  Management  & 
Budget,  Budget  of  the  United  States  Government,  Fiscal  Year  1984  Mil  (1983). 

^'^See  National  Health  Expenditures,    1984,  supra  note   12,   at   15-19;  see  also  M. 

ZUBKOFF,    I.    RUSKIN    «fe    R.    HaNFT,    HOSPITAL   CoST    CONTAINMENT    579-85    (1977). 

^"Schramm,  Can  We  Solve  the  Hospital-Cost  Problem  in  Our  Democracy? ,  311  New 
Eng.  J.  Med.  729  (1984). 

^'See  generally  A.  Enthoven,  Health  Plan:  The  Only  Practical  Solution  to  the 
Soaring  Costs  of  Health  Care  70-92  (1980). 

^^See  generally  Davis  &  Rowland,  Medicare  Reform  Options,  in  Reshaping  Health 
Care  for  the  Elderly:  Recommendations  for  National  Policy  (C.  Eisdorfer  ed., 
forthcoming). 

^^See,  e.g..  The  Corporate  Rx  for  Medical  Costs:  A  Push  for  Revolutionary  Changes 
in  the  Health  Care  Industry,  Business  Week,  Oct.   15,   1984,  at  138-41. 


1986]  COST  CONTAINMENT  923 

to  Stimulate  and  channel  change  and  to  ensure  that  whatever  change 
occurs  serves  the  public  interest. 

The  second  premise  is  that  the  forum  of  policy  change  will  be  the 
legislature.  Over  the  last  ten  years,  the  executive  branch  has  not  developed 
a  solution  acceptable  to  a  sufficiently  large  coalition  of  interests;  con- 
sequently, the  executive  branch  has  forfeited  control  of  the  health  care 
cost  issue  to  the  legislature.  Issues  that  do  not  yield  to  consensual  solution 
within  the  executive  branch  must  be  solved,  if  at  all,  in  the  legislative 
branch.  Moreover,  the  legislature,  because  it  effectively  controls  the 
spending  power  and  is  responsible  for  taxing,  has  been  required  to  act 
on  health  care  costs  from  a  budget  perspective.  Clearly,  at  the  federal 
level,  it  was  Congress  that  created  the  Omnibus  Reconciliation  Act  in 
1981,  changing  Medicaid  programs  substantially,^"^  that  fashioned  the 
overall  hospital  spending  limits  in  the  Tax  Equity  and  Fiscal  Responsibility 
Act  of  1982,^^  and  that  radically  reformed  the  payment  system  by 
instituting  diagnosis-related  payment  for  Medicare  in  the  Social  Security 
Amendments  of  1983.^^ 

The  third  premise  is  that  state  legislatures  have  become  equal  to  the 
Congress  in  developing  new  legislative  approaches  to  the  health  care  cost 
problem.  As  the  federal  ability  to  control  rising  health  care  costs  seems 
less  apparent,  states  have  moved  independently  to  control  inflation. ^^  Of 
course,  the  states  retain  regulatory  jurisdiction  over  the  hospital  industry 
and  can  co-regulate  with  the  federal  government.  But  more  important 
than  constitutional  authority  is  the  rationale  on  which  state  action  rests. 
Fundamentally,  state  authority  is  based  on  the  economic  dependence  of 
hospitals  on  revenues  generated  in  the  state  and  on  the  nature  of  the 
hospital  as  a  firm.  Once  Medicare  and  the  federal  share  of  the  Medicaid 
program  are  removed,  sixty  percent  of  hospital  revenues  come  from 
local  sources. ^^  In  addition,  because  of  the  typical  non-profit,  charitable 
nature  of  the  hospital,  the  state's  interest  in  regulation  is  heightened. 
Thus,  the  economic  rationale  for  state  intervention  seems  well-established. 

The  final  premise  is  that  state  legislatures  may  be  the  preferred 
policy  locus.  Because  the  nature  of  the  cost  problem  varies  substantially 
from  state  to  state,  both  in  terms  of  its  magnitude  and  its  causes,  and 
because  the  constellation  of  actors  and  the  strength  of  the  various  interest 


"^See  Omnibus  Reconciliation  Act  of  1981,  Pub.  L.  No.  97-35,  tit.  XXIII,  §§  2161- 
2184,  95  Stat.  357  (codified  as  amended  at  42  U.S.C.  §  1396n  (1982  &  Supp.   1985)). 
^Tax  Equity  and  Fiscal  Responsibility  Act  of  1982,  Pub.  L.  No.  97-248,  §  101(a)(1), 

96  Stat.  331-36  (codified  as  amended  at  42  U.S.C.   §§   1395ww(a),   (b)  (1982  &  Supp. 
1985)). 

^^Social  Security  Amendments  of  1983,  Pub.  L.  No.  98-21,  tit.  VI,  §  601  et  seq., 

97  Stat.  65  (codified  as  amended  at  42  U.S.C.  §   1395ww(d)  (1982  &  Supp.   1985)). 

^^See  Schramm,  supra  note  5,  at  632-41. 

^^Gibson,  Waldo  &  Levit,  National  Health  Expenditures,  1982,  5  Health  Care  Fin. 
Rev.  1,  19  (1983). 


924  INDIANA  LAW  REVIEW  [Vol.  19:919 

groups  are  different  in  each  state,  state  legislatures  are  presumably  more 
likely  to  craft  acceptable  solutions  to  meet  local  demands.  Moreover, 
in  our  federal  system,  experience  with  a  wide  variety  of  state  initiatives 
has  the  potential  of  increasing  the  development  of  more  effective  ap- 
proaches to  the  problem  of  health  care  costs. ^^ 

Overarching  each  of  the  foregoing,  however,  is  a  fundamental  concept 
of  what  role  regulation  plays  in  society.  While  many  arguments  have 
been  advanced  as  to  why  regulation  exists,  it  seems  clear  that  in  the 
case  of  economic  regulation,  the  state  is  engaged  in  balancing  interests 
that  are  not  satisfactorily  arbitrated  in  the  market. ^°  In  response  to  actual 
or  perceived  market  malfunction,  the  state  enters  to  establish  a  distri- 
butional scheme  (mainly  by  controlling  entry  and  setting  acceptable  prices) 
that  more  adequately  reflects  an  articulated  social  interest  in  the  outcome 
of  the  economic  exchange  under  scrutiny.  In  return  for  accepting  a  state 
presence,  which  necessarily  reduces  the  discretion  of  the  regulated  en- 
terprise, the  state  ensures  some  degree  of  security  to  the  regulated  entities. 
This  quid  pro  quo  reflects  the  fundamental  nature  of  regulation:  a 
formalized  bargain  where  society  exacts  more  acceptable  behavior  from 
the  regulated  firm  in  return  for  a  promise  of  protection  from  some 
features  of  the  unregulated  marketplace.^^  Contemporary  theory  in  state 
legislatures  appears  grounded  on  this  exchange  theory  as  opposed  to  the 
prevailing  federal  theory  of  unilateral  delegation. 

C.     Primer  on  State  Hospital  Regulation 

Modern  state  efforts  at  regulating  the  hospital  industry  began  in  the 
late  1960's.^^  In  several  states,  controlling  hospital  cost  inflation  emerged 
as  a  matter  for  public  concern  and  eventual  legislation  because  of  the 
public  cost  of  care  for  the  poor.  In  New  York,  where  publicly  supported 
care  of  the  poor  imposes  a  higher  tax-related  burden  than  in  any  other 
jurisdiction,  inflation  in  hospital  costs  became  a  major  issue  in  budget 
debates  of  the  late  sixties  when  it  was  apparent  that  New  York  City 
was  close  to  financial  collapse."  As  part  of  the  solution  imposed  by 
financiers,  major  reductions  in  spending,  including  for  health  care,  were 
necessitated.   Thus,   the  state  established   a  program  to   supervise  the 


^'^See  Biles,  Schramm  &  Atkinson,  supra  note  16. 

^°Breyer,  Analyzing  Regulatory  Failure:  Mismatches,  Less  Restrictive  Alternatives, 
and  Reform,  92  Harv.  L.  Rev.  549,  553  n.l7  (1979). 

^'See  Stigler,  Theory  of  Economic  Regulation,  in  Perspectives  on  the  Administrative 
Process  81  (R.  Rabin  ed.  1979);  Wilson,  The  Politics  of  Regulation,  in  Perspectives  on 
THE  Administrative  Process  90  (R.  Rabin  ed.   1979). 

^^See  generally  Schramm,  Wren  &  Biles,  supra  note  4,  at  22. 

"Health  Care  Financing  Admin.,  U.S.  Dep't  of  Health  &  Human  Services, 
National  Hospital  Rate  Setting  Study,  Vol.  VII:  Case  Study  of  Prospective  Reim- 
bursement IN  New  York  2-8  (1980). 


1986]  COST  CONTAINMENT  925 

budgets  of  all  hospitals,  attempting  to  reduce  spending  for  all  payers, 
including  Medicaid. ^^ 

The  second  state  to  establish  a  hospital  cost  containment  program 
was  Maryland,  where  hospital  trustees  were  concerned  that  inner-city 
hospitals  dealing  with  a  higher-than-average  caseload  of  indigent  patients 
were  in  a  state  of  fiscal  stress  and  might  be  forced  to  close.  As  a  result, 
trustees  of  the  state's  hospitals  petitioned  the  legislature  for  an  agency 
that  would  reduce  hospital  spending  for  all  payers  and  distribute  the 
expense  of  deUvering  care  to  the  poor  among  all  patients  by  estabhshing 
a  uniform  rate.^^ 

In  these  two  programs  the  seeds  of  the  hospital  regulation  movement 
were  planted.  In  both,  the  state  stepped  in  to  protect  both  the  citizens 
who  ultimately  pay  for  care  and  the  hospital  system  from  financial 
insolvency  related  to  uncompensated  care.  In  each  instance,  the  system 
of  budget  discipline  imposed  on  the  hospital  was  prospective  payment 
for  all  care  provided  over  a  given  period.  Also,  in  both  states  all  payers 
for  care  were  made  to  pay  the  same  price,  thus  allowing  the  costs  of 
care  provided  to  the  poor  to  be  redistributed  over  the  entire  patient 
population. 

Shortly  after  the  New  York  and  Maryland  legislatures  established 
their  programs,  four  other  states  initiated  prospective  hospital  cost- 
containment  programs. ^^  Three  of  these  states,  Connecticut,  Massachu- 
setts, and  New  Jersey  were  in  the  northeast,  where  state  legislatures  had 
created  substantial  Medicaid  programs  in  the  mid-sixties.  Because  of  the 
balanced  budget  requirements  of  state  constitutions  and  recession-con- 
nected declines  in  tax  revenues,  these  states  were  interested  in  reducing 
hospital  cost  inflation  from  a  budgetary  perspective.  Another  goal  of 
the  legislation  was  that  both  consumers  and  hospitals  would  benefit  from 
a  system  that  rationalized  payment  schemes  among  payers  such  that  all 
citizens  profited  from  reduced  spending  on  hospital  care. 

Because  of  varying  delays  in  collecting  necessary  financial  infor- 
mation, all  six  states  began  regulating  hospital  rates  at  virtually  the  same 
time.  Examination  of  the  regulatory  period  from  1976  to  the  present 


^''1965  N.Y.  Laws  795  (codified  as  amended  at  N.Y.  Pub.  Health  Laws  §  2807 
(McKinney  1985  &  Supp.  1986)). 

"See  1971  Md.  Laws  627  (codified  as  amended  at  Md.  Health-Gen.  Code  §§19- 
201  to  19-220  (Supp.  1985)). 

'*The  states  were  Connecticut,  1973  Conn.  Acts  117  (codified  as  amended  at  Conn. 
Gen.  Stat.  Ann.  §§  19a-145  to  19a-166  (West  1986));  Massachusetts,  1973  Mass.  Acts 
1229  (codified  as  amended  at  Mass.  Gen.  Laws  Ann.  ch.  6A,  §§  31-77  (West  1986)); 
New  Jersey,  1971  N.J.  Laws  136;  1978  N.J.  Laws  83  (codified  as  amended  at  N.J.  Stat. 
Ann.  §  26:2H-4.1  (West  Supp.  1986));  and  Washington,  1973  Wash.  Laws  ch.  5  (codified 
as  amended  at  Wash.  Rev.  Code  Ann.  §§  70.39.030  to  70.39.910  (West  1975  &  Supp. 
1986)). 


926  INDIANA  LAW  REVIEW  [Vol.  19:919 

has  consistently  shown  statistically  significant  reductions  in  the  rate  of 
hospital  cost  inflation  in  the  regulated  states. ^^  It  is  these  data  that  in 
part  account  for  the  growing  interest  in  hospital  regulation  at  the  state 
level. 

D.     State  Activity  to  Date  and  its  Classification 

After  nearly  fifteen  years,  there  are  now  several  types  of  formal 
state-level  initiatives  to  control  hospital  costs.  The  most  extensive,  typified 
by  the  first  six  states,  is  the  regulation  of  total  hospital  revenues  and 
the  rates  that  all  payers  in  the  state  are  charged  for  care.  In  1983, 
Maine,  West  Virginia,  and  Wisconsin  enacted  statutes  similar  to  those 
in  effect  in  the  original  six  states. ^^ 

A  second  group  of  states  are  those  that  supervise  hospital  rates  but 
do  not  have  authority  to  set  them.  For  example,  in  Florida,  a  public 
body  exists  to  collect  hospital  price  information  and  to  disclose  it  publicly. ^^ 
A  third  type  of  statute  merely  requires  reporting  of  information  on 
hospital  prices  to  a  state  agency,  which  in  turn  may  publish  the  infor- 
mation."^^  While  it  is  still  too  early  to  judge  the  latter  two  types  of 
efforts,  ample  evidence  suggests  that  cost-containment  programs  are 
effective  in  direct  proportion  to  the  amount  of  government  power  vested 
in  the  regulating  agency.  Mere  disclosure,  for  example,  cannot  be  expected 
to  be  effective  where  consumers  are  fully  insured  against  the  costs  of 
care. 

II.     The  Parties  and  Their  Interests 

A.     The  Identities  and  Interests  of  the  Twelve  Groups 

Most  matters  considered  by  legislatures  evoke  the  attention  of  only 
two  or  three  groups  affected  by  a  proposal.  The  groups  include  pro- 
ponents (often  private  citizen/consumers,  businesses,  social  reformers, 
and  the  executive  departments  of  government)  who  seek  legislative  action 
on  their  behalf  or  on  behalf  of  their  cause;  unqualified  opponents  of 
the  proposal;  and  those  who  will  be  marginally  disadvantaged  by  the 
measure  and  oppose  its  passage  until  the  offending  features  have  been 
discarded.  When  proposals  that  would  limit  hospital  revenues  are  under 
consideration,  however,  at  least  twelve  parties  with  distinguishable  in- 
terests have  been  observed  to  take  active  roles.  The  presence  of  many 
interest  groups  makes  the  consensus  necessary  for  the  passage  of  leg- 

"Biles,  Schramm  &  Atkinson,  supra  note  16. 

''See  Me.  Rev.  Stat.  Ann.  tit.  22,  §  381  (West  Supp.  1986);  W.  Va.  Code  §§  16-5F-1 
to  16-5F-6  (1985);  Wis.  Stat.  Ann.  §§  54.01  et  seq.  (West  Supp.  1986).  See  Appendix  for 
a  summary  of  a  variety  of  state  efforts. 

""See  Fla.  Stat.  Ann.  §§  395.501-395.514  (West  1986). 

"^See  1971  Cal.  Stat.  1242. 


1986]  COST  CONTAINMENT  927 

islation  problematic  for  two  reasons:  the  process  of  multilateral  nego- 
tiations is  cumbersome  and  expensive,  and  the  number  of  issues  in 
dispute  is  extremely  large. 

As  a  result  of  the  large  number  of  interested  parties,  hospital  rate- 
setting  proposals  present  a  curious  legislative  phenomenon;  namely,  un- 
predictable coalition  behavior  among  the  interest  groups  depending  on 
the  positions  they  adopt  from  state  to  state.  Indeed,  several  of  these 
groups  have  taken  diametrically  opposing  positions  in  different  juris- 
dictions. Compounding  matters  is  the  unpredictable  identity  of  the  "in- 
itiator" party  from  state  to  state. 

What  follows  is  a  description  of  the  interest  groups  and  their  re- 
spective positions  on  the  question  of  regulating  hospital  revenue.  The 
order  in  which  they  are  presented  does  not  reflect  their  importance  to 
the  legislative  process.  Once  the  groups  and  their  causes  are  identified, 
the  possible  initiators  of  legislation  are  examined.  Finally,  the  coalition 
behavior  of  the  parties  is  explored  and  likely  legislative  outcomes — which 
ultimately  depend  on  the  nature  and  number  of  parties  forming  the  most 
forceful  coalition — are  discussed. 

1.  Community  Hospitals. — This  group  is  composed  of  non-profit  or 
voluntary,  acute  care  community  hospitals.  More  specifically,  the  interest 
group  represents  the  position  of  professional  administrators  working  in 
these  hospitals.  Their  interests  can  often  be  distinguished  from  those 
who  have  a  stake  or  interest  in  the  hospital  and  its  continued  existence; 
for  example,  hospital  trustees.  As  will  be  discussed  in  more  detail  below, 
community  hospital  trustees  have  traditionally  represented  what  might 
be  thought  of  as  a  long  term  local  interest  in  the  hospital. 

The  American  Hospital  Association  (AHA),  the  national  interest 
group  whose  membership  is  overwhelmingly  composed  of  hospital  chief 
executives,  has  vigorously  resisted  the  adoption  of  rate  setting.  Reduced 
to  its  essence,  the  position  of  the  AHA  is  based  on  the  criticism  that 
regulation  reduces  the  managerial  discretion  of  the  professional  admin- 
istrator.'^^ Professional  administrators  recognize  that  their  interests  might 
diverge  from  those  of  trustees,  and  the  AHA  has  attempted  to  influence 
hospital  trustees  to  its  way  of  thinking.  For  example,  the  Association 
has  established  a  separate  trustee  educational  effort  and  has  founded  a 
magazine  designed  to  influence  trustees'  perspectives.'*^ 

2.  Hospital  Trustees.— TiVi^iQQS  are  more  closely  connected  to  the 


""See  Hearings  Before  the  Subcomm.  on  Health  of  the  Senate  Comm.  on  Finance 
on  State  Hospital  Payment  Systems,  97th  Cong.,  2d  Sess.  236  (1982)  (statement  of  the 
American  Hospital  Association);  Knieser,  Free  Market  System  Is  Still  the  Best  Answer, 
56  Hospitals  31  (1982);  see  also  Am.  Hosp.  Ass'n,  supra  note  4;  Am.  Hosp.  Ass'n,  How 
States  Can  Opt  Out  of  the  Federal  Medicare  DRG  System:  A  Summary  of  Legal 
Issues  (1983). 

"•^This  magazine  is  Trustee,  published  monthly  by  the  American  Hospital  Publishing 
Co. 


928  INDIANA  LAW  REVIEW  [Vol.  19:919 

hospital's  role  in  the  community  than  many  of  the  individuals  who  work 
in  the  hospital  every  day.  To  the  extent  that  the  hospital  is  viewed  as 
a  community-owned  resource,  often  based  literally  on  a  financial  trust 
dedicated  to  community  welfare,  trustees  may  view  themselves  as  the 
custodians  of  a  very  special  community  asset. 

In  contrast  to  the  essential  '^localness"  of  the  trustee's  interests, 
professional  administrators  participate  in  national  labor  markets,  and 
their  allegiance  to  a  given  institution  often  appears  minimal.  Whereas 
administrators,  qua  professionals,  view  themselves  as  important  to  the 
orderly  functioning  of  the  nation's  hospitals,  trustees  represent  community 
concerns  and  continuity  of  interest  in  the  fortunes  and  successes  of  a 
local  institution.  Thus,  from  time  to  time,  one  can  observe  a  clear 
divergence  of  interest  between  trustees  and  professional  hospital  lead- 
ership. 

In  the  case  of  rate  setting,  a  state  presence  may  be  desirable  or  at 
least  less  threatening  to  trustees  who  are  members  of  the  community 
elite  and  can  informally  make  their  voices  heard  in  government  circles. 
In  Maryland,  trustees  initiated  the  movement  that  ultimately  resulted  in 
the  creation  of  a  state  agency  with  authority  to  set  hospital  revenue 
limits;  they  saw  government  as  the  only  means  to  distribute  equitably 
the  burden  of  uncompensated  care  and  thus  preserve  the  hospital  system 
in  a  time  of  significant  economic  stress.  Administrators,  who  as  outsiders 
do  not  enjoy  comparable  government  access,  tend  to  view  rate  setting 
as  an  affront  to  their  professional  competence  in  making  decisions  related 
to  hospital  resource  use."*^ 

3.  For-Profit  Hospitals. — For-profit  hospitals,  whose  political  im- 
portance varies  enormously  from  state  to  state  depending  on  the  share 
of  hospital  services  provided  by  investor-owned  hospitals,  have  always 
opposed  rate-setting  legislation.  The  basis  of  their  opposition  seems 
obvious;  in  regulated  markets,  firms  have  their  profit  level  determined 
by  a  regulatory  agency  which  customarily  ties  approved  rates  to  actual 
costs  of  production  plus  a  rate~of-return  on  investment.  In  such  systems, 
investor-owned  hospital  executives  believe  that  the  freedom  to  seek  max- 
imum profit  is  removed.  It  appears  that  the  resistance  for-profit  hospitals 
offer  to  state-level  proposals  to  hmit  hospital  revenue  has  little  to  do 
with  the  number  of  for-profit  hospitals  within  a  jurisdiction.  Rather, 
the  behavior  of  for-profit  hospitals  toward  new  rate-setting  proposals 
suggests  that  the  for-profit  industry  operates  with  the  domino  theory  in 
mind — each  additional  state  adopting  hospital  regulation,  even  if  there 
is  no  significant  investor-owned  market  share,  increases  the  Hkelihood 
of  regulation  in  other  states. ^^ 


*^See  Jolly,  Election  Post-Mortem:  Arizona  Hospital,  Business  Health  Cost  Fight 
Fizzles,  Bus.  «fe  Health,  March  1985. 

**See  Statement  by  Cyndee  Eyster,  Director  of  State  Legislation,  Federation  of 
American  Hospitals,  to  the  Special  Committee  on  Health  Care  Cost  Containment  and  the 


1986]  COST  CONTAINMENT  929 

4.  Blue  Cross. — Blue  Cross  plans  were  founded  by  hospitals  as  non- 
profit insurance  schemes  by  which  patients  would  fund  hospital  care 
through  premiums/^  As  such,  most  state  Blue  Cross  plans  operate  as 
specially  chartered,  non-profit,  tax-exempt  entities.  Over  the  years,  be- 
cause of  the  close  link  between  hospitals  and  Blue  Cross  (until  the  last 
decade  overlapping  boards  of  directors  were  common), ^^  Blue  Cross  plans 
with  larger  market  shares  have  enjoyed  significant  discounts  from  hospital 
charges  in  paying  for  their  subscribers'  care/^  To  the  extent  that  rate- 
setting  legislation  would  set  hospital  prices  evenly  among  all  payers,  in 
an  attempt  to  shift  bad  debt  equitably  among  all  hospitals  and  patients. 
Blue  Cross  will  find  the  proposal  objectionable  because  it  will  result  in 
a  major  inhibition  to  maintaining  what  Blue  Cross  considers  competitive 
rates /^ 

5.  Commercial  Insurers. — Because  commercial  insurance  companies 
do  not  have  direct  contracts  with  providers  as  do  Blue  Cross  plans 
(where  the  subscriber/patient  stands  legally  as  a  third  party  beneficiary), 
but  rather  indemnify  the  insured/patient,  they  have  not  been  able  to 
extract  discounts  from  hospitals.  Commercial  health  carriers  argue  that 
as  a  result,  virtually  every  other  payer— because  they  contract  directly 
with  hospitals  on  behalf  of  a  pool  of  patients,  albeit  an  uncertain  and 
unpredictable  pool  from  the  perspective  of  any  one  hospital — is  able  to 
extract  some  discount  from  hospital  charges.  Thus,  commercial  carriers 
argue  that  hospital  administrators,  in  order  to  meet  the  demands  for 
discounts  made  by  direct  payers  (Blue  Cross,  Medicare,  Medicaid,  and 
workers'  compensation),  pass  on  the  costs  of  this  practice  to  those 
patients  who  pay  full  charges  and  seek  indemnification  from  their  in- 
surers.^^  The  practice  of  imposing  higher  charges  on  commercially  insured 
patients,  commonly  referred  to  as  cost-shifting,  operates  to  disadvantage 
the  indemnification  carriers  by  raising  their  claims  expenses.  As  a  result, 
commercial  insurers  generally  endorse  cost-containment  proposals  which 
promise  the  equitable  treatment  of  all  payers. 

6.  Medicaid. — Every  state  except  Arizona  established  a  Medicaid 
program  shortly  after  Congress  passed  the  federal  act  in  1965.^^  Under 
the  statute.  Congress  provided  that  roughly  half  of  all  costs  of  state 
programs  would  be  met  from  the  federal  treasury  provided  that  state 
programs  included  certain  minimum  benefits. ^^  During  the  1970's,  Med- 

Human  Resources  Committee  of  the  National  Conference  of  State  Legislatures  (September 
1984). 

''^S.  Law,  Blue  Cross:  What  Went  Wrong?  6-25  (2d  ed.  1976). 

"^See,  e.g.,  Weller,  "Free  Choice''  as  a  Restraint  of  Trade  in  American  Health  Care 
Delivery  and  Insurance,  69  Iowa  L.  Rev.   1351,  1370-71  (1984). 

"''S.  Law,  supra  note  45,  at  1-5. 

^«Ginzburg,  Hospital  Cost  Shifting,  310  N.  Eng.  J.  Med.  893,  895-96  (1984). 

'^Id.  at  897. 

^Twenty  Years  of  Medicare  and  Medicaid,  supra  note  11,  at  16. 

^'Social  Security  Amendments  of  1965,  Pub.  L.  No.  89-97,  tit.  I,  §§  121-122,  79 
Stat.  343  (codified  as  amended  at  42  U.S.C.  §§  1396  et  seq.  (1982  &  Supp.   1985)). 


930  INDIANA  LAW  REVIEW  [Vol.  19:919 

icaid  programs  felt  the  financial  strain  of  hyper-inflation  in  peculiar 
ways.  State  revenue  is  often  more  sensitive  to  general  economic  conditions 
because  of  sales  tax,  and  the  recessionary  conditions  of  the  seventies 
reduced  state  income  substantially."  In  states  with  relatively  generous 
Medicaid  programs,  inflation  in  health  care  costs  and  a  growing  number 
of  beneficiaries  caused  Medicaid  expenditures  to  become  a  major  part 
of  state  budgets  by  the  1970's.^^ 

State  budget  officers  have  long  seen  Medicaid  as  particularly  im- 
portant to  the  fiscal  condition  of  the  state  and  have  pressured  Medicaid 
programs  to  reduce  expenditures.  Because  federal  law  requires  only 
minimum  benefits  and  state  enactments  often  expand  the  minimum, 
policy  attempts  to  reduce  costs  have  basically  focused  on  three  avenues. 
The  first  is  to  reduce  the  number  of  beneficiaries  by  readjusting  eligibility 
standards  for  program  coverage. ^"^  The  second  has  been  to  pressure 
providers  into  giving  Medicaid  discounts  against  either  charges  or  costs. 
These  discount  approaches  have  proceeded  directly,  for  example  by 
Medicaid  unilaterally  determining  that  it  will  not  pay  for  inpatient  care 
after,  say,  the  twentieth  day  of  hospitalization,  or  indirectly,  by  not 
increasing  the  payment  for  physician  visits  from  amounts  established  as 
long  as  a  decade  ago.^^  The  third  approach  has  been  to  advance  plans 
that  would  reduce  the  rate  of  inflation  of  costs  in  order  to  lessen  the 
growth  of  the  Medicaid  expenditure  from  year  to  year.^^ 

While  governors  may  feel  obliged  to  be  sympathetic  to  the  interests 
of  hospitals  and  others  who  might  be  harmed  by  regulation,  the  condition 
of  state  budgets  imposes  a  certain  unavoidable  demand  on  executives' 
allegiance.  While  cases  exist  where  a  state  health  department  has  publicly 
assumed  a  position  on  rate  setting  contrary  to  an  executive's,  such 
situations  are  rare  and  generally  change  once  the  governor  imposes 
executive  discipline. 

7.  Medicare. — For  the  most  part,  the  federal  government's  role  in 
the  rate-setting  debate  at  the  state  level  has  been  minimal.  In  1972, 
Congress  sanctioned  state  hospital  cost  containment  initiatives  when  it 
offered  a  waiver  of  Medicare  reimbursement  principles  to  those  states 
experimenting  with  rate  regulation. ^^  Under  this  authority,  several  of  the 


"The  Reagan  Experiment:  An  Examination  of  Economic  and  Social  Policies 
Under  the  Reagan  Administration  157-219  (J.  Palmer  &  I.  Sawhill  eds.  1982). 

"Wing,  The  Impact  of  Reagan-Era  Politics  on  the  Federal  Medicaid  Program,  33 
Cath.  U.  L.  Rev.   1  (1983). 

5^R.   BOVBJERG  &  J.   HOLAHAN,   MEDICAID  IN  THE  ReAGAN  Era:   FEDERAL  POLICY  AND 

State  Choices  25-32  (1982). 

"Intergovernmental  Health  Policy  Project,  Recent  and  Proposed  Changes  in 
State  Medicaid  Programs:  A  Fifty  State  Survey  (1983). 

^^R.  BovBjERG  &  J.  HoLAHAN,  supra  note  54,  at  38-45. 

"Social  Security  Amendments  of  1972,  Pub.  L.  No.  92-603,  tit.  II,  §  222,  86  Stat. 
1390. 


1986]  COST  CONTAINMENT  931 

rate-setting  states  were  granted  Medicare  waivers  in  which  the  federal 
government  agreed  to  pay  its  Medicare  obHgations  according  to  the  rate 
schedule  set  by  the  state  agency.  In  1983,  Congress  mandated  that  if 
certain  requirements  were  met  by  a  state  rate-setting  agency,  the  Secretary 
of  Health  and  Human  Services,  acting  through  the  federal  Health  Care 
Financing  Administration  (HCFA),  must  grant  a  waiver  to  the  applicant. ^^ 
Notwithstanding  the  nondiscretionary  nature  of  this  congressional  di- 
rective, the  Reagan  Administration,  acting  through  the  Office  of  Man- 
agement and  Budget,  has  taken  a  decidedly  hostile  approach  to  Medicare 
waivers. ^^  The  Administration  seems  to  perceive  rate  setting  as  an  ob- 
jectionable advance  of  regulation  in  society  and  to  believe  that  it  should 
not  be  encouraged  as  a  matter  of  poHcy. 

Medicare's  non-participation  may  influence  state  legislation  regarding 
rate  setting  in  the  future.  To  the  extent  that  rate  setting  is  attractive 
because  it  imposes  the  same  rate  schedule  on  all  payers,  thus  making 
all  payers  share  equally  in  uncompensated  care,  federal  participation  is 
critical.  Apart  from  its  philosophical  objection,  the  Reagan  Adminis- 
tration does  not  support  the  waiver  option  because  of  its  perception 
that  Medicare  expenditures  have  been  higher  in  waiver  states  than  they 
would  have  been  under  normal  Medicare  reimbursement  methods. ^°  Not- 
withstanding evidence  to  the  contrary,^*  it  remains  to  be  seen  whether 
the  Administration  will  attempt  to  revoke  federal  participation  in  existing 
waivers  or  grant  waivers  to  the  new  rate-setting  states. 

8.  Business. — In  recent  years,  business  leaders  have  become  increas- 
ingly active  in  the  debate  over  solving  hospital  costs.  Indeed,  the  interest 
of  business  has  served  to  refocus  the  problem  away  from  concern  over 
hospital  cost  inflation  to  concern  over  both  the  absolute  level  of  hospital 
prices  and  aggregate  hospital  spending  in  a  given  community. ^^  Business 
has  joined  other  interests,  most  notably  organized  labor,  in  an  attempt 
to  force  a  discussion  of  what  might  be  done  in  the  community  to  reduce 
total  hospital  budgets.  In  many  cases,  employers  have  acted  to  reduce 
actual  claims  expense. ^^  Generally  this  action  has  involved  pressuring 
hospitals  and  Blue  Cross  plans  to  reduce  both  utilization  by  employees 
and  the  unit  prices  charged  by  the  hospital  to  employees. 

This  movement  is  significant  because  it  represents  the  first  time  a 


^«Tax  Equity  and  Fiscal  Responsibility  Act  of   1982,   Pub.   L.   No.   97-248,  tit.   I, 
§  101(a)(1),  96  Stat.  334  (codified  at  42  U.S.C.  §  1395ww(c)  (1982  &  Supp.   1986)). 
^"^See,  e.g.,  Washington  Report  on  Medicine  and  Health,  Oct.  29,   1984,  at  38. 

•^'S.  Renn,  The  Efficacy  of  Waivers  (1984)  (unpublished  paper.  The  Johns  Hopkins 
Center  for  Hospital  Finance  and  Management). 

''See  generally  The  Corporate  Rx  for  Medical  Costs:  A  Push  for  Revolutionary 
Changes  in  the  Health  Care  Industry,  Business  Week,  Oct.   15,  1984,  at  138-41. 

"See,  e.g..  Jolly,  supra  note  43;  Meyerhoff  &  Crozier,  Health  Care  Coalitions:  The 
Evaluation  of  a  Movement,  3  Health  Aff.  120  (1984). 


932  INDIANA  LAW  REVIEW  [Vol.  19:919 

major  division  between  a  community's  employers  and  a  community's 
hospitals  has  been  observed.  It  probably  reflects  in  part  the  decision  by 
employers  over  the  last  decade  personally  to  bear  the  risk  of  hospital 
costs  by  self -insuring.  ^"^  Self-insurance  has  forced  many  Blue  Cross  plans 
to  play  the  limited  role  of  claims  administration.  As  a  result,  if  an 
employer  is  dissatisfied  with  its  claims  expense,  it  may  move  directly 
against  a  group  of  hospitals  in  an  attempt  to  secure  lower  costs. 

9.  Organized  Labor. — Fringe  benefits,  including  health  insurance, 
have  long  been  regarded  by  the  leadership  of  organized  labor  as  one 
of  unionism's  greatest  achievements.^^  Thus,  there  has  been  little  historic 
concern  over  the  matter  of  rising  hospital  costs  since  higher  costs  have 
been  viewed  as  resulting  in  more  and  better  care.  Employers  paid  for 
all  or  most  of  the  costs  of  insurance,  and  union  leadership  has  been 
largely  disinterested  in  the  absolute  cost  of  these  benefits.  However,  in 
recent  times,  the  growth  of  fringe  benefit  expenses  has  been  so  great 
that  employers  have  been  more  aggressive  in  bargaining.  Unions  have 
experienced  negotiations  in  which  little  or  no  increase  in  take-home  wages 
was  possible  because  fringe  benefit  increases  had  eaten  away  all  that 
the  employer  was  willing  to  give  or  all  that  labor  was  able  to  bargain. 
Faced  with  such  a  vital  challenge  to  the  bargaining  process,  union 
leadership  has  increasingly  concluded  that  hospital  prices  must  be  con- 
trolled. 

The  position  of  organized  labor  regarding  hospital  rate  setting  has 
been  ambivalent  in  the  past  and  continues  to  be  ill-defined  despite  an 
increased  sense  of  its  importance.  In  some  jurisdictions  where  hospital 
workers  are  organized,  revenue  control  of  hospitals  is  perceived  as 
inevitably  leading  to  reduced  employment.  Recently,  however,  organized 
labor  has  officially  determined  that  it  supports  the  concept  of  hospital 
rate  regulation  and  has  worked  on  behalf  of  regulation  in  West  Virginia." 

10.  Consumers.— Consumers  have  only  recently  emerged  as  a  force 
in  rate-setting  legislation.  Because  they  have  traditionally  been  shielded 
from  the  true  costs  of  health  care  by  comprehensive  insurance,  consumers 
have  been  relatively  indifferent  to  inflation  in  this  sector  of  the  economy. 
Insurance  carriers  have  historically  paid  the  costs  of  health  care  no 
matter  how  fast  unit  prices  increased.  Consumer  apathy  has  been  ex- 
acerbated by  the  very  nature  of  hospital  care  finance,  a  field  so  complex 


^The  Corporate  Rx  for  Medical  Costs:  A  Push  for  Revolutionary  Changes  in  the 
Health  Care  Industry,  Business  Week,  Oct.  15,  1984,  at  138-41;  see  also  Iglehart,  Big 
Business  and  Health  Care  in  the  Heartland:  An  Interview  with  Robert  Burnett,  3  Health 
Aff.  40  (1984). 

^^See  Dunlop,  Health  Care  Coalitions,  in  Prfvate  Sector  Coalitions:  A  Fourth 
Party  in  Health  Care  10-11  (B.  Jaeger  ed.  1982). 

•^West  Virginia  Labor  Fed'n  (AFL-CIO),  Committee  on  Political  Education, 
Legislative  Report  Sixty-Fifth  Legislature  16  (1982). 


1986]  COST  CONTAINMENT  933 

that  it  would  require  a  substantial  investment  of  time  for  individuals  to 
comprehend  the  extent  of  their  coverage  and  their  exposure. 

However,  recent  erosion  of  the  fully  protective  nature  of  insurance, 
evidenced  by  increased  copayments  and  deductibles,  coupled  with  the 
erosion  and  threatened  cutbacks  in  programs  protecting  the  elderly  and 
the  poor,  have  forced  more  consumer  advocates  to  turn  their  attention 
to  the  issue  of  rising  heahh  care  costs. ^^  Nearly  all  consumers  have  faced 
reductions  in  current  coverage.  Employer  and  union  approaches  have 
primarily  involved  reductions  in  the  "first  dollar"  aspects  of  coverage 
in  an  attempt  to  make  the  consumer  more  price  conscious  and  thus 
more  judicious  in  the  use  of  care.^^  Similarly,  Medicare  and  Medicaid 
have  been  attempting  to  control  provider  (hospitals  and  physicians) 
expenditures  for  several  years  with  little  success.  As  a  result,  both 
programs  have  turned  their  attention  to  the  patient/beneficiary  as  a 
means  of  curbing  program  costs  in  light  of  uncontrollable  provider 
behavior. 

11.  Physicians.— ?\\ys\Q,\dins  always  resist  proposals  to  control  hospital 
revenue.  Their  objections  appear  founded  on  the  notion  that  if  hospital 
revenue  is  constrained,  ultimately  the  freedom  of  the  physician  to  make 
choices  related  to  the  use  of  the  hospital  will  be  reduced.  To  the  extent 
that  physicians  make  a  disproportionate  share  of  their  income  from 
activities  related  to  patient  care  in  hospitals, ^^  rate  regulation  is  seen  as 
a  potential  negative  force  on  physician  incomes.  Others  have  suggested 
that  physician  resistance  is  based  on  the  domino  theory — if  hospital 
prices  are  regulated,  physician  prices  will  be  next.  Recent  action  by  the 
Congress  in  the  1984  Medicare  amendments  suggests  this  fear  may  not 
be  groundless.''^ 

12.  Nurses. — Nurses  have  not  played  an  important  role  in  the  rate- 
setting  debate  as  yet.  Where  they  have  been  visible,  in  only  a  handful 
of  states,  their  resistance  has  been  orchestrated  by  the  state  hospital 
association.  Indeed,  the  only  position  taken  by  spokespersons  for  nursing 
interests  has  been  that  regulation  has  adverse  effects  on  patient  care.^' 
Putting  aside  the  quality  issue,  however,  regulation  will  have  no  evident 


^^See  Am.  Ass'n  of  Retired  Persons,  1985  Federal  &  State  Legislative  Policy 
(1985). 

^^See  Havighurst,  Competition  in  Health  Services:  Overview,  Issues  and  Answers,  34 
Vand.  L.  Rev.  1117  (1981);  see  also  Goldsmith,  Death  of  a  Paradigm:  The  Challenge 
of  Competition,  3  Health  Aff.  5  (1984). 

^"^See  Showstack,  Blumberg,  Schwartz  &  Schroeder,  Fee-for-Service  Physician  Pay- 
ment: Analysis  of  Current  Methods  and  Their  Development,  16  Inquiry  230  (1979). 

™5ee  Deficit  Reduction  Act  of  1984,  Pub.  L.  No.  98-369,  §  2306,  div.  B,  tit.  Ill, 
98  Stat.  494,  1070  (amending  42  U.S.C.  §  1395u(b)  (1982)). 

''^See  Schramm,  Economic  Perspectives  on  the  Nursing  Shortage,  in  Nursing  in  the 
1980's,  at  55  (L.  Aiken  <&  S.  Gortner  eds.   1982). 


934  INDIANA  LAW  REVIEW  [Vol.  19:919 

economic  impact  on  nurses  other  than  potentially  reducing  system-wide 
demand  for  nurses  involved  in  inpatient  care.^^ 

Any  description  of  the  actors  and  their  interests  would  be  incomplete 
without  noting  that  members  of  legislatures  have  their  own  interests  to 
advance  on  the  issue  of  hospital  regulation.  Most  legislators  have  hospitals 
in  their  districts,  which  have  tutored  them  on  the  causes  of  hospital 
inflation  and  the  evils  of  rate  setting.  On  the  other  hand,  legislators 
inevitably  deal  with  larger  social  issues  and  are  compelled  to  behave 
with  state-wide  interests  relative  to  the  state's  budget.  This  tension 
between  serving  the  interests  of  their  constituent  hospitals  and  the  needs 
of  the  state  sometimes  makes  the  issue  of  hospital  cost  control  trou- 
blesome for  legislators.  The  very  nature  of  the  hospital  cost  control 
problem,  i.e.,  its  complexity,  persistence,  and  political  intractability, 
makes  it  more  amenable  to  a  regulatory  solution  whereby  the  legislature 
delegates  its  authority  to  a  continuing  agency.  This  approach  takes 
hospital  decisions  out  of  the  hands  of  the  legislature  and  places  them 
in  the  "independent"  branch  of  government  where  politicians  cannot 
be  held  responsible  for  the  outcome  of  the  regulatory  process. ^^ 

B.     The  Initiator 

One  of  the  most  interesting  aspects  of  the  legislative  process  relating 
to  hospital  cost  containment  is  the  changing  identity  of  the  initiator  of 
regulatory  efforts  from  state  to  state.  As  one  might  suspect,  the  parties 
involved  have  somewhat  different  interests  in  each  state.  For  example, 
in  jurisdictions  where  Blue  Cross  market  penetration  is  significant,  sizable 
discounts  against  charges  are  often  encountered.  In  these  states,  Blue 
Cross  would  clearly  oppose  any  action  to  equalize  rates  among  payers. 
On  the  other  hand,  in  states  where  Blue  Cross  does  not  enjoy  such 
discounts.  Blue  Cross  might  look  upon  rate  regulation  as  a  positive 
development  designed  to  keep  claims  expense  under  control. 

Based  on  experience  to  date,  the  parties  that  have  first  presented 
the  idea  of  regulating  hospital  rates  have  included  hospital  trustees, 
governors,  business,  commercial  insurers,  and  consumers.  In  each  case, 
the  interest  in  the  issue  is  different.  Trustees  see  rate  regulation  as  a 
means  of  protecting  hospitals  from  unequal  exposure  to  bad  debt  expense, 
thus  stabilizing  the  industry  as  a  whole.  Governors  espouse  the  notion 
of  controlling  hospital  inflation  as  a  means  of  dampening  the  demand 
of  state  Medicaid  programs  for  general  funds.  Business  leaders  have 
advocated  regulation  out  of  frustration  with  hospital  inflation.  Com- 
mercial insurers  see  regulation  as  a  means  of  equity  in  payment  and 


'^Id.  at  44-49. 

"Kinney,  Coordinating  Rate  Setting  and  Planning  in  States  with  Mandatory  Hospital 
Rate  Regulation:  What  Makes  a  Difference?  (to  be  published  in  Journal  of  Legal  Medicine). 


1986]  COST  CONTAINMENT  935 

protection  against  cost  shifting.  Finally,  consumers  have  argued  for  rate 
controls  to  address  the  growing  burden  of  insurance  copayments  and 
deductibles. 

Obversely,  certain  parties  have  never  supported  rate  regulation,  much 
less  acted  as  proponents.  These  include  hospital  associations  and  the 
investor-owned  hospitals,  medical  societies,  and  nurses.  The  perception 
of  each  group  is  that  if  rate  review  legislation  were  to  emerge,  its 
economic  interest  might  be  impaired. 

Several  actors  have  been  on  each  side  of  the  issue  in  different  states, 
and  on  each  side  of  the  issue  in  the  same  jurisdiction,  but  in  different 
periods  of  time.  Business  has  been  divided  on  whether  regulations  are 
necessary.  As  mentioned  above,  many  business  leaders  abhor  the  notion 
of  encouraging  the  spread  of  regulation,  notwithstanding  their  perception 
that  hospitals  will  not  estabhsh  spending  restraints  on  their  own.  Likewise, 
organized  labor  has  historically  resisted  hospital  regulation  as  an  implicit 
reduction  in  the  benefits  available  to  members  and  as  a  potential  threat 
to  the  jobs  of  the  many  unionized  hospital  workers.  A  final  example 
of  ambiguous  support  is  the  action  of  Governor  James  Thompson  of 
Illinois,  who  endorsed  legislation  designed  to  estabhsh  a  hospital  reg- 
ulation agency  and  then  failed  to  appropriate  the  funds  needed  to  give 
it  Hfe.^^ 

In  conclusion,  one  is  reminded  of  the  work  of  Anthony  Downs 
regarding  the  factors  that  make  issues  the  subject  of  public,  specifically 
legislative,  attention.  Downs  argues  that  ideas  move  into  pubhc  debate 
and  are  dealt  with  depending  on  the  parties  introducing  the  idea  and 
the  amount  of  pubhc  support  the  idea  receives. ^'^  The  crux  of  Downs' 
theory  is  that  issues  change  through  time,  and  predicting  what  action 
will  emerge  depends  largely  on  who  initially  brings  an  idea  to  public 
attention.  In  the  case  of  rate  setting,  because  of  the  large  number  of 
interested  parties,  the  importance  of  the  initiator  of  the  idea  is  over- 
whelmed by  the  identity  of  parties  who  support  the  notion. 

C.     Coalitions  of  Parties  and  Their  Behavior 

While  the  formation  of  coalitions  is  key  in  understanding  the  process 
that  brings  hospital  revenue  regulation  about,  there  is  little  systematic 
knowledge  about  the  operation  of  joint  interests.  There  are,  however, 
certain  groups  whose  interests  seem  to  coincide  and  others  where  certain 
antipathy  is  observed.  The  most  commonly  observed  link  is  between 
commercial  insurers  and  employers,  if  employers  are  at  all  active  on  the 
issue.  Likewise,  the  bond  between  hospitals  and  Blue  Cross  seems  certain. 


'^See  Crozier,  State  Rote-Setting:  A  Status  Report,  1  Health  Aff.  74  (1982). 
"Downs,  Up  and  Down  with  Ecology:  The  "Issue-Attention  Cycle,"  28  Pub.  Interest 
38  (1972). 


936  INDIANA  LA  W  REVIEW  [Vol.  19:919 

In  most  cases,  the  similarity  of  positions  between  trustees  and  hospitals 
prompts  joint  activity  to  resist  rate  setting.  Increasingly,  where  business 
has  taken  a  positive  stand,  it  is  supported  by  organized  labor,  due  largely 
to  the  formal  existence  of  labor-management  coalitions. 

Just  as  certain  parties  find  it  in  their  interest  to  work  together,  the 
opposite  also  holds.  Blue  Cross  and  commercial  insurers  seldom  appear 
to  work  together,  just  as  physicians  never  join  employers  or  unions  in 
their  positions.  Similarly,  for-profit  hospitals  will  never  work  with  or- 
ganized labor,  Medicaid,  Medicare,  and  organized  nurses  generally  op- 
erate on  their  own  and  seldom  become  an  integral  part  of  any  coalition. 

D.  Likely  Outcomes — Predicting  Success  or  Failure 

In  the  legislative  process,  it  is  always  difficult  to  predict  success  or 
failure  with  any  certainty.  Considering  the  enormous  diversity  among 
state  legislatures,  it  is  virtually  impossible  to  develop  a  paradigm  that 
would  be  useful  in  forecasting  the  outcome  of  a  drive  to  bring  about 
hospital  rate  regulation.  However,  several  postulates  appear  helpful  in 
understanding  the  legislative  disposition  of  hospital  revenue  control  pro- 
posals. The  first  is  that  no  one  group  can  be  successful  in  a  legislative 
campaign.  It  appears  that  some  majority  of  the  more  important  actors 
must  support  legislation  in  order  for  it  to  pass.  The  second  postulate 
is  that  active  opposition  by  a  small  number  of  key  interests  can  prevent 
passage.  It  appears  that  hospitals,  working  with  Blue  Cross,  have  generally 
been  successful  in  preventing  passage,  especially  if  trustees  have  been 
active  in  their  resistance.  The  third  postulate  is  related;  namely,  no  one 
group  can  prevent  passage.  Acting  alone,  hospitals,  physicians,  organized 
labor,  and  Blue  Cross  have  been  unable  to  prevent  the  passage  of  rate- 
setting  legislation. 

The  net  importance  of  these  observations  is  that  one  must  watch 
the  joint  behavior  of  the  parties  surrounding  a  legislative  proposal. 
Success  or  failure  lies  in  the  coalitions  that  effectively  work  for  or  against 
the  proposal. 

III.     Positions  of  the  Parties 

A.     The  Context  of  Argument  in  the  Legislative  Milieu 

Having  observed  the  legislative  and  executive  process  related  to 
hospital  rate  regulation  in  several  jurisdictions,  it  is  possible  to  inventory 
the  major  positions  advanced  by  proponents  and  opponents  of  regulation. 
Because  of  the  apparent  interest  in  the  phenomenon,  this  Article  gives 
limited  attention  to  the  arguments  in  favor  of  hospital  rate  regulation. 
Instead,  it  concentrates  in  more  detail  on  the  arguments  offered  by 
opponents.  This  approach  should  prove  more  useful  in  understanding 


1986]  COST  CONTAINMENT  937 

the  legislative  process,  as  legislation  typically  succeeds  more  by  over- 
coming negatives  than  by  being  embraced  for  its  obvious  utility  to  society. 

B.     Why  Hospital  Rate  Settingl 

The  statistical  case  that  rate-setting  achieves  the  objectives  of  leg- 
islation establishing  a  regulatory  mechanism  for  hospital  revenues  is 
rather  easily  made  and,  indeed,  is  nearly  universally  confirmed  by  eval- 
uative research  on  the  effects  of  the  regulatory  process. ^^  In  the  post- 
1976  regulatory  era,  the  rate  of  increase  in  the  cost  of  an  average  hospital 
admission  has  risen  more  slowly  in  the  original  six  rate-setting  states 
than  in  the  45  remaining  jurisdictions — a  finding  of  particular  interest 
given  the  contrary  inflationary  experience  of  the  six  states  in  the  pre- 
regulatory  period. ^^  Inflation  in  the  cost  of  a  hospital  stay  is  a  convenient 
proxy  for  measuring  the  effectiveness  of  the  legislation  in  accomplishing 
its  goal  of  reducing  overall  inflation. 

C.     Arguments  on  Behalf  of  Rate  Setting 

Given  the  success  of  the  original  state  efforts  to  control  hospital 
spending,  it  is  interesting  to  examine  the  arguments  advanced  on  behalf 
of  hospital  revenue  regulation  more  carefully.  It  is  important,  however, 
to  appreciate  that  for  the  most  part,  the  success  of  rate  setting  has  been 
Hnked  to  its  ability  to  impose  the  same  rate  on  all  payers  for  hospital 
care.  In  most  states,  hospitals  charge  a  variety  of  prices  for  the  same 
services  depending  on  the  source  of  payment.  Thus,  cash  paying  patients 
and  those  insured  by  indemnity  policies  (commercial  insurance)  are  re- 
ferred to  as  charge-based  payers  because  they  pay  for  the  actual  cost 
of  their  care  plus  a  markup  to  the  charged  price.  Medicare  and  many 
state  Medicaid  plans  have  traditionally  paid  * 'reasonable  costs,"  with 
no  markup  over  the  actual  cost  of  providing  care  for  the  beneficiaries. 
In  four  of  the  original  rate-setting  states,  the  federal  government,  using 
its  authority  to  waive  Medicare  regulations,  agreed  to  reimburse  hospitals 
at  the  rates  set  by  the  state  agencies.  In  several  states,  Medicaid  programs 
pay  less  than  actual  costs  by  setting  lower-than-cost  fee  schedules  for 
hospital  care.  In  between  are  payers  such  as  workers'  compensation 
carriers  that  pay  according  to  a  fee  schedule.  Blue  Cross  plans  which 
generally  pay  charges  minus  a  contractually-agreed  discount,  and  other 


'^See,  e.g..  Biles,  Schramm  &  Atkinson,  supra  note  16;  Sloan,  Rate  Regulation  as 
a  Strategy  for  Hospital  Cost  Control:  Evidence  from  the  Last  Decade,  61  Milbank  Mem. 
Fund  Q.  195  (1983).  But  see  Mitchell,  Issues,  Evidence,  and  the  Policymaker's  Dilemma, 
1  Health  Aff.  84  (1982);  Morrisey,  Sloan  &  Mitchell,  State  Rate-Setting:  An  Analysis 
of  Some  Unresolved  Issues,  2  Health  Aff.  36  (1983). 

"See  Appendix,  Fig.  1  for  the  rate  of  cost  increases  in  the  original  six  states  and 
Figs.  2-7  for  the  experience  in  each  of  the  six. 


938  INDIANA  LA  W  REVIEW  [Vol.  19:919 

payers  who  have  entered  into  agreements  for  discounts  with  the  hospital. 
Clearly,  the  existence  of  multiple  price  schedules  in  hospitals  suggests 
the  existence  of  cross-subsidization  of  costs  among  patients  depending 
on  payment  source. ^^  In  this  respect,  the  average  hospital  operates  as  an 
implicit  social  taxing  scheme  on  its  patients. 

The  most  important  argument  advanced  for  the  initiation  of  rate- 
setting  is  that  it  clearly  establishes  strong  incentives  to  reduce  price 
inflation  and  ultimately  to  reduce  the  underlying  costs  of  hospital  care. 
To  the  extent  that  certain  price  levels  are  disallowed  by  the  agency,  the 
hospital  must  act  to  reduce  costs. 

The  second  most  persuasive  argument  relates  to  the  uniform  price 
imposed  in  "all-payer"  states;  namely,  that  hospitals  find  all  patients 
equally  attractive.  In  states  where  different  rates  of  reimbursement  attach 
to  different  patients,  equal  access  to  hospital  care  is  jeopardized.  Hospitals 
clearly  find  certain  patients  more  attractive  than  others.  Likewise,  where 
the  state  agency  adjusts  the  uniform  price  in  each  hospital  to  reflect 
the  cost  of  caring  for  poor  patients,  the  hospital  can  be  immunized 
against  the  risk  of  uncompensated  care  to  those  patients  who  have  no 
form  of  insurance  protection.  Thus,  discounts  are  awarded  only  to  payers 
who  offer  demonstrated  cost  savings  to  hospitals,  and  no  payer  bears 
an  unequal  obligation  to  subsidize  the  care  of  uncovered  patients.  Related 
to  inter-payer  equity  is  the  removal  of  any  cause  for  hospitals  to  tax 
certain  payers  by  "cost-shifting"  unmet  expenses  from  some  patients  to 
others. 

Finally,  in  a  package  of  attributes  that  might  be  characterized  as 
management  reforms,  hospitals  in  regulated  jurisdictions  operate  within 
a  more  predictable  revenue  environment,  with  a  consistent  set  of  incentives 
and  payment  methods  from  carrier  to  carrier.  Further,  due  to  the  public 
collection  of  information,  hospitals  in  regulated  jurisdictions  find  eval- 
uation of  comparative  performance  easier. 

D.    Arguments  Against  Hospital  Revenue  Regulation 

Opponents  of  hospital  revenue  regulation  fall  into  two  types:  those 
who  oppose  regulation  in  general  and  those  who  object  specifically  to 
hospital  rate  control.  The  former  adapt  general  economic  arguments 
against  regulation  to  the  hospital  setting.  The  latter  argue  from  experience 
and  use  the  record  of  hospital  regulation  in  other  jurisdictions  as  evidence 
of  why  regulation  should  not  be  adopted  in  the  instant  case.  In  the 
legislative  milieu,  these  theoretical  and  experiential  arguments  are  both 
used  simultaneously  and  are  often  confused  with  each  other. 

1.  Adverse  Effects  of  Hospital  Regulation  in  General.— The  general 


^^See  generally  B.  Kinkead,  Pricing  Policy  in  the  Hospital  Industry  (1984)  (unpublished 
thesis,  Johns  Hopkins  University). 


1986]  COST  CONTAINMENT  939 

arguments  against  hospital  regulation  are  variants  of  well-known  anti- 
regulatory  reasoning  that  has  developed  over  the  hundred-year  span  of 
regulation  in  America.  The  most  important  generic  argument  relates  to 
the  effect  of  regulation  on  competition  and  the  operation  of  market 
forces.  Quite  clearly  the  most  commonly  shared  value  in  the  American 
economy  is  the  importance  of  freely  functioning  markets.  Our  commercial 
creed  is  based  on  the  notion  that  markets  act  to  distribute  goods  im- 
partially in  a  manner  that  maximizes  efficient  production  and  equitable 
distribution.  Notwithstanding  the  importance  of  this  economic  tenet,  our 
history  since  the  advent  of  industrialism  has  been  rife  with  tension  between 
parties  attempting  to  control  markets  and  maximize  profits.  In  the  early 
phases  of  industrialism,  private  interests  appeared  to  consolidate  capital, 
manufacturing,  and  distribution  networks  in  order  to  reap  "monopoly" 
profits.  As  government  responded  to  perceived  abuses  in  the  market  by 
enacting  antitrust  laws,  it  appeared  as  if  government  was  seeking  to 
regulate  markets  in  the  interest  of  the  consumer.  Most  economists  believe, 
however,  that  government  regulation  of  markets  merely  reflects  a  trans- 
formation of  the  mechanism  by  which  large  commercial  interests  operate 
to  protect  their  market  shares  and,  consequently,  their  prof  its. ^^  Thus, 
economists  argue  that  while  business  interests  vociferously  oppose  reg- 
ulation in  general  as  destructive  of  the  working  of  the  free  market, 
many  businesses  enjoy  and  seek  government  intervention  in  ordering  the 
market  in  which  they  operate. 

The  foregoing  demonstrates  that  regulation  has  been  ubiquitous  in 
our  economic  order  for  nearly  one  hundred  years.  That  regulation  is 
antithetical  to  the  operation  of  free  markets  is  not  clear  from  history, 
nor  is  it  clear  that  consumers  would  tolerate  an  exclusively  competitive 
market.^^  Indeed,  as  suggested  above,  the  existence  of  regulation  in  an 
industry  cannot  be  interpreted  as  the  triumph  of  government  over  private 
interests.  Rather,  it  suggests  that  a  public  presence  has  been  introduced 
as  an  implicit  bargain  which  occurs  through  our  pohtical  process.  Con- 
sumer/voters acting  through  their  government  have  extracted  price  conces- 
sions in  exchange  for  a  government  promise  to  protect  the  regulated 
industry  from  potential  competitors  and  sagging  profits.  From  this  per- 
spective, it  is  difficult  to  view  the  position  that  regulation  is  antithetical 
to  competition  and  our  free  market  tradition  as  anything  but  a  historic 
and  simple  perspective  on  a  tremendously  complex  issue. ^^ 

Closely  linked  to  the  argument  that  regulation  is  anticompetitive  is 
the  position  that  it  inhibits  innovation  and  experimentation.  Much  of 
what  we  value  in  the  free  enterprise  system  are  the  dynamics  of  the 
constant  vying  for  market  share.  As  a  result,  competitive  firms  are  forced 


^"^See  Stigler,  supra  note  31. 

^^See  generally  S.  Breyer,  supra  note  13,  at  1-35. 

^'See  generally  H.  Commager,  The  American  Mind  (1950). 


940  INDIANA  LAW  REVIEW  [Vol.  19:919 

to  innovate  and  experiment  with  new  products.  In  a  regulated  market, 
it  is  feared  that  formal  entry  rules  will  inhibit  new  competitors,  and 
that  existing  firms  will  no  longer  feel  pressured  to  innovate  and  seek 
improved  efficiencies.  As  a  result,  consumers  will  not  benefit  from  lower 
prices  over  time. 

A  third  general  argument  against  regulation  is  that  the  transaction 
costs  of  regulation  are  excessive.  For  example,  regulated  firms  must  bear 
the  additional  legal  and  administrative  costs  of  complying  with  rules 
that  are  not  imposed  by  the  marketplace  as  well  as  the  process-related 
costs  of  seeking  government  approval  for  decisions.  The  burden  of  these 
process  costs  is  passed  on  to  consumers.  Surveys  by  hospital  associations 
suggest  that  the  costs  of  complying  with  regulatory  requirements  add 
substantially  to  hospital  costs. ^^  Moreover,  some  argue  that  the  costs  of 
regulation  are  borne  disproportionately  by  regulated  firms  and  that  larger 
firms  bear  relatively  heavier  costs  than  smaller  firms.  In  any  event,  the 
distillate  of  these  claims  is  that  regulation  is  costly  and  that  the  burden 
of  these  costs  does  not  fall  neutrally  on  all  firms. ^^ 

The  final  contention  against  regulation  is  that  it  intrudes  into  the 
decision-making  authority  of  management.  In  the  case  of  hospitals,  it 
is  further  argued  that  regulation  eventually  invades  the  clinical  decision 
making  of  physicians. ^"^  Regardless  of  the  motive  for  regulation,  the  very 
nature  of  the  process  circumscribes  the  authority  of  managers  and  ad- 
ministrators. The  existence  of  a  public  agency  charged  with  setting 
operating  rules  for  the  industry  and  monitoring  the  behavior  of  regulated 
firms  is  the  mechanism  whereby  the  public's  interest  in  the  firm's  decision 
making  is  presumably  established. 

The  arguments  against  regulation  in  general  meet  peculiar  difficulty 
when  applied  to  hospitals.  Regarding  the  theory  of  imposing  a  public 
interest  in  the  decision  making  of  the  hospital,  it  must  be  remembered 
that  the  typical  hospital  was  estabhshed  as  a  public  service  entity,  in 
nearly  all  instances  as  a  non-profit,  charitable  institution.^^  It  is  therefore 
curious  that  hospitals  would  resist  the  imposition  of  a  regulatory  scheme 
whose  rationale  is  to  protect  the  public  from  the  unbridled  discretion 
of  the  regulated  entities.  Likewise,  regarding  regulatory  costs  in  the 
hospital  industry,  many  of  the  regulatory  strictures  already  in  place  were 
developed  by  hospitals  themselves  in  an  attempt  to  develop  uniform 


^^See,  e.g.,  Hosp.  Ass'n  of  New  York  State,  Cost  of  Regulation,  Report  of 
THE  Task  Force  on  Regulation  (1978);  Lewin,  Sommers  &  Sommers,  State  Health  Cost 
Regulation  and  Administration,  6  Toledo  L.  Rev,  647  (1975). 

''See  Cutler  &  Johnson,  Regulation  and  the  Political  Process,  84  Yale  L.J.  1395 
(1975). 

^See  Zuckerman,  Becker  &  Adams,  Physician  Practice  Patterns  Under  Hospital  Rate- 
Setting  Programs,  252  J.  A.M.A.  2589  (1984). 

''See  Am.  Hosp.  Ass'n,  Hospital  Statistics,  1986  ed.  18-19,  Table  5A  (1987). 


1986]  COST  CONTAINMENT  941 

Standards  for  their  industry.  Indeed,  few  if  any  industries  in  our  economy 
have  been  so  persistent  in  estabUshing  self-policing  bodies  such  as  the 
Joint  Commission  on  Accreditation  of  Hospitals  (JCAH)  or  in  seeking 
legislative  delegation  to  these  private  regulatory  efforts.^^  For  example, 
a  hospital  can  become  a  certified  Medicare  provider  and  qualify  for 
federal  payment  simply  by  receiving  JCAH  accreditation.^^ 

2.  Specific  Adverse  Effects  of  Hospital  Regulation. — The  specific 
adverse  effects  of  hospital  regulation  are  generally  associated  with  a 
particular  interest  which  might  be  offended.  For  this  reason,  the  problems 
with  regulation  will  be  examined  from  five  perspectives. 

a.  Financial  effects  on  hospitals. — Because  revenue  is  affected,  hos- 
pitals argue  that  regulation  seriously  erodes  their  short  and  long  term 
financial  strength.  In  the  short  term,  it  is  argued  that  regulation  affects 
the  liquidity  of  the  hospital,  threatening  its  ability  to  meet  current 
liabilities  from  current  revenues.  Through  time,  the  additive  nature  of 
this  revenue  shortfall  is  said  to  threaten  the  hospital's  solvency.  As  a 
result,  accumulated  capital  resources,  particularly  endowment  funds,  are 
used  to  the  long-term  detriment  of  the  hospital's  fiscal  stability. 

On  the  basis  of  Stigler's  theory  of  regulation,  one  would  not  expect 
this  outcome. ^^  Indeed,  one  would  suspect  that  the  presence  of  regulation 
would  lead  to  a  strengthened  fiscal  position  for  the  hospital.  Some 
evidence  suggests  that  this  is  so.  While  hospital  operating  margins  in 
the  first  six  regulated  states  were  lower  than  in  other  jurisdictions,  through 
time  hospitals  in  regulated  states  have  experienced  constant  improvement 
in  their  margins  relative  to  their  past  and  to  the  non-regulated  juris- 
dictions.^^ 

Related  to  the  argument  that  their  fiscal  status  is  jeopardized  by 
revenue  regulation  is  the  hospitals'  contention  that  the  presence  of  a 
regulatory  scheme  operates  as  a  liability  in  hospital  capital  markets.  This 
contention  is  important  because  public  capital  markets  have  become 
increasingly  important  to  hospitals  in  recent  years. ^'^  Roughly  a  decade 
ago,  most  new  capital  investment  in  hospitals  was  funded  through  phil- 
anthropic gifts  and  accrued  surpluses;  now,  however,  most  new  con- 
struction is  funded  through  revenue  supported  debt  obligations  sold  by 
hospitals  on  the  pubUc  bond  market.^'  Should  a  hospital  operating  in 


**II  A  Hospital  Law  Manual,  Licensure  I  (1980). 

^'See  42  U.S.C.  §  1395bb  (1982  &  Supp.  1985).  See  generally  Jost,  The  Joint 
Commission  on  Accreditation  of  Hospitals:  Private  Regulation  of  Health  Care  in  the  Public 
Interest,  24  B.C.L.  Rev.  835  (1983). 

^^See  Stigler,  supra  note  31. 

*'5ee  Appendix,  Fig.  8. 

^See  generally  D.  Cohodes  &  B.  Kinkead,  Hospital  Capital  Formation  in  the 
1980's  (1984). 

'•M  at  51-53. 


942  INDIANA  LAW  REVIEW  [Vol.  19:919 

a  regulated  environment  find  its  ability  to  place  revenue  bonds  impaired, 
it  could  greatly  increase  the  cost  of  debt  service  through  the  life  of  the 
obligation.  While  investors  may  have  previously  viewed  the  hospital  rate- 
setting  agency  as  an  impediment  to  the  hospital's  ability  to  set  rates  at 
levels  sufficient  to  support  its  debt  service,  hospital  capital  markets  are 
now  taking  comfort  in  the  presence  of  an  agency  which,  among  other 
goals,  seeks  to  insure  the  hospital  from  bad  debt  (traditionally  the  greatest 
threat  to  an  institution's  long-term  solvency),  and  which  has  had  a 
demonstrable  positive  effect  on  operating  margins. ^^ 

b.  Adverse  effects  on  medical  practice  and  the  organization  of  the 
market  for  care. — Perhaps  the  most  important  argument  relating  to  the 
advent  of  regulation  is  that  is  has  unintended  and  counterproductive 
consequences.  Most  of  these  * 'secondary"  effects  relate  to  changes  in 
medical  practice  and  a  reorganization  of  the  medical  care  delivery  system 
in  response  to  the  establishment  of  a  regulatory  system. 

These  observations  generally  rest  on  the  early  utilization  experience 
of  hospitals  during  the  first  years  of  hospital  rate  regulation.  Initially, 
rate-setting  methods  focused  on  controlling  the  rate  of  change  in  unit 
prices  within  the  hospital  for  all  services  delivered  to  patients. ^^  In 
response,  quite  naturally,  hospitals  began  to  increase  the  volume  of  units 
delivered  in  order  to  protect  overall  revenues.  Likewise,  there  is  some 
evidence  that  hospitals  encouraged  increased  admissions,  again  to  protect 
the  level  of  revenues.^  Soon  after  this  response  was  observed,  regulatory 
agencies  developed  new  rate-setting  methods  which  established  positive 
incentives  for  hospitals  to  reduce  overall  costs.  Thus,  regardless  of  the 
change  in  the  regulated  price  per  unit  of  service,  the  hospital  would 
attempt  to  reduce  the  overall  budget.  One  such  approach  developed  in 
Maryland  is  referred  to  as  the  Guaranteed  Inpatient  Revenue  System. ^^ 
Here,  as  in  the  recently  adopted  federal  Medicare  payment  system,  a 
hospital  is  paid  a  set  amount  per  admitting  diagnosis.  Under  the  Maryland 
system,  at  the  beginning  of  the  fiscal  year,  the  agency  promises  a 
prospectively  agreed  upon  budget  to  a  hospital  producing  care  for  a 
given  number  of  cases  of  a  certain  complexity  (based  on  its  historic 
experience)  as  measured  by  diagnostic  groups.  Should  a  hospital  deliver 


^^See,  e.g.,  Effects  of  New  Jersey's  DRG  Hospital  Reimbursement  System  on 
Hospitals'  Access  to  Capital  Markets,  Report  of  the  Health  Research  and  Edu- 
cational Trust  of  New  Jersey  (1983). 

"Health  Care  Financing  Admin.,  U.S.  Dep't  of  Health  &  Human  Services, 
First  Annual  Report  of  the  National  Hospital  Rate-Setting  Study:  A  Comparative 
Review  of  Nine  Prospective  Rate-Setting  Programs  (1980). 

^"Worthington  &  Piro,  The  Effects  of  Hospital  Rate-Setting  on  Volumes  of  Hospital 
Services:  A  Preliminary  Analysis,  4  Health  Care  Fin.  Rev.  47  (1982). 

'^For  a  description  of  the  Guaranteed  Inpatient  Revenue  System,  see  Esposito,  Hupfer, 
Mason  &  Rogler,  Abstracts  of  State  Legislated  Hospital  Cost-Containment  Programs,  4 
Health  Care  Fin.  Rev.   129,   143-44  (1982). 


1986]  COST  CONTAINMENT  943 

care  under  budget,  it  keeps  fifty  percent  of  all  savings.  Thus,  the  hospital 
has  a  strong  incentive  to  improve  internal  efficiency  and  not  to  increase 
volumes. 

A  second  undesired  effect  of  regulation  is  the  reordering  of  the 
market  resulting  from  efforts  to  avoid  the  reach  of  the  rate-setting 
agency.  Increasingly,  hospitals  have  been  attempting  to  diversify  into  a 
large  number  of  out-of-hospital  ventures,  including  off-campus  ambu- 
latory surgical  facilities,  nursing  homes,  and  diagnostic  centers  that  are 
not  traditionally  within  the  contemplation  of  the  enabhng  statutes.  As 
a  result,  hospital  rates  may  be  held  constant  but  overall  spending  on 
health  care  may  accelerate  as  hospitals  "unbundle"  their  services,  in- 
tending to  maximize  revenue  by  developing  whole  new  markets.  This 
phenomenon  points  out  one  area  for  improvement  needed  in  regulation, 
namely,  control  of  capital  decisions  related  to  the  situs  of  health  care. 
Most  communities  are  burdened  with  excess  hospital  capacity.  Increas- 
ingly, it  appears,  more  efficient  and  cheaper  treatment  sites  such  as 
ambulatory  care  facilities  and  HMO's  are  being  developed.  As  this  trend 
continues,  the  overinvestment  in  unnecessary  hospital  capacity  becomes 
more  acute.  Therefore,  states  should  consider  removing  inefficient  ca- 
pacity by  closing  or  encouraging  the  merger  and  consolidation  of  existing 
facilities.  ^^ 

c.  Adverse  effects  on  payers. — Obviously,  if  regulation  operates  well, 
payers  should  benefit  by  having  their  claims  expense  reduced.  However, 
all  payers  will  not  be  equally  affected,  just  as  all  payers  will  not  have 
an  equal  interest  in  hospital  cost  containment.  Hospital  revenue  regulation 
may  have  beneficial  results  for  some  and  harmful  effects  for  others, 
before  examining  the  impact  of  regulation  on  various  payers,  it  is 
important  to  remember  that  in  non-regulated  jurisdictions,  real  hospital 
costs  differ  substantially  from  one  payer  to  the  next.^^  To  the  extent 
that  rate  setting  sets  a  uniform  price  for  all  payers,  those  presently 
enjoying  price  concessions  (in  many  states,  everyone  except  cash-paying 
patients  and  indemnity  or  commercial  insurance  carriers)  will  resist  reg- 
ulation. It  is  also  important  to  note  that  from  the  perspective  of  some 
carriers,  the  fundamental  premise  of  controUing  hospital  price  inflation 
may  not  be  in  their  interest.  For  those  carriers  who  have  their  rates 
established  by  state  insurance  commissions  (all  carriers  except  Medicare 
and  Medicaid),  premiums  are  often  set  on  the  basis  of  claims  expenses 
plus  some  allowance — usually  a  percentage  of  expenses  for  administrative 
costs.  Thus,  these  carriers  have  actually  benefited  from  rising  a  hospital 
costs! 


^^See,  e.g..  Final  Report  of  the  Governor's  Commission  on  Ohio  Health  Care 
Costs  (July  9,  1984);  Final  Report  of  the  Governor's  Task  Force  on  Health  Care 
Cost  Containment  (State  of  Maryland,  Dec.   14,  1984). 

^^See  generally  Ginzburg,  supra  note  48. 


944  INDIANA  LAW  REVIEW  [Vol.  19:919 

In  regulatory  systems  where  hospital  costs  will  be  controlled  for  a 
subset  of  payers  (e.g.,  Medicaid  and  Blue  Cross — a  system  once  in  effect 
in  Massachusetts),  costs  will  unavoidably  be  shifted  to  the  unregulated 
payers.  If  the  regulated  cost  of  a  stay  is  set  lower  than  the  average 
prevaihng  in  the  hospital,  and  the  institution  cannot  shift  its  cost  curve 
in  the  short  run,  it  will  attempt  to  shift  the  shortfalls  incurred  in  serving 
patients  covered  by  regulated  payers  to  patients  to  whom  the  hospital 
is  free  to  charge  any  price.  As  hospitals  shift  unmet  expenditures,  the 
unregulated  carriers  may  experience  a  relatively  higher  rate  of  claims 
cost  than  prevailed  in  the  pre-regulatory  period.  This  cost-shifting  burden 
has  been  felt  most  heavily  by  commercial  carriers  who,  because  of  their 
indemnity  relationship  with  their  insureds,  are  among  the  last  payers 
whose  rates  are  included  in  regulation. ^^ 

Closely  related  to  the  issue  of  cost-shifting  among  payers  treated 
unequally  by  rate  setting  is  the  burden  an  all-payer  approach  might  place 
on  the  state  treasury  should  Medicaid  be  required  to  pay  at  the  same 
rate  as  other  payers.  Especially  in  jurisdictions  where  the  state  Medicaid 
program  has  unilaterally  established  payment  schedules  substantially  be- 
low the  rates  charged  to  other  payers,  the  legislature  will  find  it  difficult 
to  deal  with  the  initial  costs  of  reestablishing  Medicaid  payment  at  equal 
levels.  In  1982,  for  example,  Governor  Thompson  of  Illinois  decided 
that  even  though  he  had  endorsed  a  hospital  regulatory  program  enacted 
by  the  legislature,  the  cost  of  bringing  the  state's  Medicaid  payments 
up  to  those  required  by  the  all-payer  nature  of  the  program  was  too 
high,  and  the  legislation  was  never  implemented.^^ 

In  addition  to  the  adverse  effects  that  concern  both  the  commercial 
insurers  and  Medicaid  programs,  there  is  concern  that  Medicare  obli- 
gations increase  in  states  where  the  federal  program  reimburses  at  rates 
established  by  state  agencies.  The  federal  government  may  choose  in 
certain  jurisdictions  to  pay  at  rates  other  than  its  nationwide  payment 
method.'^  As  noted  previously,  in  an  attempt  to  stimulate  state  exper- 
imentation with  all-payer  rate  setting,  Congress  recently  enacted  statutory 
language  providing  that  any  state  enacting  comprehensive  regulatory 
programs  that  set  hospital  rates  for  all  payers  would  qualify  for  a  waiver 
of  the  Medicare  payment  method.  The  Reagan  Administration  has  viewed 
the  proHferation  of  hospital  rate  setting  as  an  undesirable  expansion  of 
government  regulation.  ^^^  It  has  argued  that  where  Medicare  pays  rates 
in  accordance  with  all-payer  systems,  the  total  cost  to  the  Medicare 
program  exceeds  what  would  have  been  paid  under  prevailing  payment 
principles.  However,  recent  studies  have  established  that  Medicare  pay- 


''Id. 

^See  Crozier,  supra  note  74,  at  74. 
^°°See  S.  Renn,  supra  note  61,  at  1. 
'"'See  Washington  Report  on  Medicine  and  Health,  Oct.  29,  1984,  at  38. 


1986]  COST  CONTAINMENT  945 

ments  in  the  regulated  states  where  the  federal  government  has  waived 
its  payment  principles  have  in  fact  been  substantially  lower  than  they 
would  have  been  absent  the  waiver. '°^ 

The  final  payer  adversely  affected  by  rate-setting  legislation  is  Blue 
Cross.  As  noted  above,  many  Blue  Cross  plans  enjoy  discounts  against 
charges  because  of  their  close  connection  with  hospitals,  their  policy  of 
not  contesting  claims,  and  their  assurance  to  hospitals  regarding  method 
of  payment.  To  the  extent  that  an  all-payer  system  would  reduce  these 
discounts  or  limit  them  to  their  economic  value  to  the  hospital,  Blue 
Cross  will  be  adversely  affected  since  it  will  have  to  compensate  for  the 
resulting  increase  in  claims  expense  by  increasing  premiums  in  the  short 
run. 

d.  Adverse  effects  on  patient /consumers. — Two  arguments  are  ad- 
vanced relating  to  the  adverse  effects  of  regulation  on  patients.  The  first 
suggests  that  one  of  the  inevitable  outcomes  of  regulation  is  the  rationing 
of  care.  This  argument  holds  that  when  hospital  budgets  are  constrained, 
less  care  will  be  delivered  and  some  hospital  needs  of  the  population 
will  go  unmet.  The  argument  assumes  that  productivity  within  the  hospital 
cannot  be  improved  and  that  the  level  of  hospital  care  currently  delivered 
is  medically  necessary.  Indeed,  the  weight  of  all  the  evidence  related  to 
this  question  indicates  that  we  are  oversupplied  with  hospitals. 

The  second  adverse  consequence  of  regulation  from  the  patient's 
perspective  is  its  potential  impact  on  the  quality  of  care.  In  reasoning 
similar  to  that  underlying  the  rationing  argument,  opponents  of  hospital 
revenue  limits  suggest  that  with  fewer  resources  at  the  physician's  com- 
mand, the  patient  will  be  deprived  of  necessary  services  and  supplies 
for  maximum  quality  care.  Because  there  are  virtually  no  scientific 
measures  of  quality  available,  any  statement  about  quality  can  be  nothing 
more  than  expert  opinion.  It  could,  in  fact,  be  argued  that  by  setting 
resource  constraints  on  hospitals,  one  of  the  benefits  to  emerge  will  be 
strong  incentives  to  examine  treatment  outcomes  more  carefully  so  as 
to  optimize  resource  use. 

e.  Adverse  effects  on  hospital  employees. — The  final  category  of 
arguments  against  rate  setting  is  that  it  will  have  adverse  effects  on 
those  who  are  economically  Hnked  to  the  continued  well-being  of  in- 
dividual hospitals.  While  the  number  of  individuals  potentially  affected 
by  a  reduction  in  spending  on  hospital  care  is  extremely  large,  hospital 
employees  are  likely  to  be  the  most  immediately  affected  by  any  potential 
reduction  of  hospital  revenue.  One  reason  why  this  group  receives  such 
attention  is  that  if  a  hospital  is  to  keep  its  operating  expenses  in  line 
with  permitted  revenues,  it  must  focus  attention  on  labor  costs.  Labor 
costs  alone  account  for  over  sixty  percent  of  hospital  expenses. '^^ 


^^See  S.  Renn,  supra  note  61. 

'"^Am.  Hosp.  Ass'n,  Hospital  Statistics  23  (1984). 


946  INDIANA  LAW  REVIEW  [Vol.  19:919 

Concern  over  the  impact  of  hospital  regulation  on  employment  is 
most  commonly  articulated  in  two  arguments.  First,  hospitals  will  move 
to  reduce  labor  expenses  before  any  other  cost-cutting  approaches  are 
taken.  Obviously,  because  labor  expenses  account  for  such  a  high  share 
of  total  costs,  attention  will  be  focused  on  reducing  labor  costs  by  layoffs 
and/or  reductions  in  pay  levels.  In  the  case  of  layoffs,  enormous  political 
pressure  builds  on  local  officials  to  seek  ways  of  expanding  the  hospital's 
budget  in  order  to  protect  jobs.  In  the  case  of  wage  reductions,  employees 
generally  find  such  steps  enormously  unnerving  to  their  sense  of  security, 
and  the  hospital  adopting  such  a  strategy  may  jeopardize  organization 
morale. 

The  second  labor-related  argument  is  akin  to  the  first  but  reflects 
a  more  subtle  approach  to  reducing  labor  costs.  It  involves  the  substitution 
of  higher-skilled  with  lower-skilled  and  lower-paid  workers.  For  example, 
faced  with  new  budget  constraints,  a  hospital  might  attempt  to  substitute 
registered  nurses  with  lower-paid  practical  nurses,  or  it  might  attempt 
to  use  nurse  anesthetists  in  conjunction  with  physician  anesthesiologists. 
There  is  some  evidence,  however,  that  in  regulated  situations  some 
hospitals  attempt  to  improve  efficiency  by  replacing  lower-skilled  per- 
sons with  fewer,  more  highly  paid  personnel. ^^"^ 

IV.     Discussion 

The  issue  of  regulating  hospital  rates  will  grow  in  importance  in  the 
future.  Indeed,  state  legislative  activity  in  this  area  will  increase,  as  will 
other  avenues  to  establish  a  formal  role  for  state  government  in  the 
regulation  of  hospital  finances.  One  of  the  most  interesting  lessons  from 
observing  legislative  proceedings  in  eighteen  states  is  the  unpredictabihty 
of  the  outcome.  As  mentioned  at  the  outset,  the  multiphcity  of  parties 
and  the  inconsistency  of  their  coalition  behavior  from  state  to  state 
make  the  legislative  process  very  difficult  to  control,  and  often  it  appears 
a  risky  investment  for  those  seeking  to  enact  rate-setting  laws. 

Examining  the  legislative  outcome  in  several  states  suggests  the  dif- 
ficulty of  working  through  legislation  relating  to  hospitals.  Of  the  eighteen 
states  where  legislation  has  been  proposed  or  introduced  during  the  last 
three  years,  laws  have  emerged  in  only  three.  While  it  is  difficult  to 
draw  comparisons  with  other  types  of  legislation,  this  success  rate  seems 
particularly  low.  On  the  other  hand,  previous  observations  suggest  that 
there  is  a  long  gestation  period  for  statutory  proposals  to  limit  hospital 
revenues.  Moreover,  the  hospital  industry  nearly  always  ranks  among 
the  largest  in  terms  of  aggregate  budgets  in  any  state. 

In  response  to  the  unpredictability  and  difficulty  of  pursuing  a 
legislative  program,  recently  it  appears  as  if  those  seeking  cost  contain- 


"^Schramm,  supra  note  71,  at  45. 


1986]  COST  CONTAINMENT  947 

merit  through  the  regulation  of  hospitals  have  taken  new  non-legislative 
approaches.  By  far  the  most  dramatic  has  been  the  referendum  attempt 
conducted  in  Arizona  in  the  fall  of  1984.  Here,  a  coalition  of  major 
businesses  interested  in  the  establishment  of  a  regulatory  system  for 
hospital  budgets  was  urging  a  rate-setting  bill  upon  the  state  legislature. '°^ 
The  hospitals'  opposition  was  extremely  strong  and  the  legislature  was 
apparently  deadlocked.  As  an  avenue  for  circumventing  the  legislature, 
the  employer  coalition  ran  a  successful  drive  for  a  state-wide  referendum 
in  November  of  1984.  The  legislature  similarly  developed  several  proposals 
related  to  hospital  costs  and  placed  them  on  the  November  ballot. 
Likewise,  the  hospitals  developed  a  referendum  proposal  calling  for 
limited  regulation.  In  all,  five  regulatory  proposals  went  before  the  voters. 
None  passed  despite  what  appeared  in  exit  polling  as  a  strong  commitment 
to  the  idea  by  a  majority  of  the  voters.  Explanations  of  the  results  vary, 
but  the  important  observation  here  is  that  while  the  legislative  route 
may  prove  difficult,  the  shortcut  of  referenda  seems  equally  if  not  more 
unpredictable.  Similar  referendum  campaigns  have  been  discussed  in  other 
states,  but  since  the  Arizona  experience,  interest  in  the  idea  appears  to 
have  declined. 

An  emerging  alternative  to  hospital  revenue  legislation  seems  to  be 
attempts  to  change  the  underlying  causes  of  the  problem  of  high  absolute 
hospital  cost.  In  general,  these  approaches  appear  to  focus  on  two 
separate  issues — one  institutional  and  the  other  more  market-oriented. 
The  first  relates  to  the  oversupply  of  hospital  beds.  For  over  twenty 
years,  the  connection  between  excess  hospital  beds  and  high  costs  has 
been  recognized  and  has  motivated  policy  at  both  the  federal  and  state 
levels.  In  the  last  few  years,  however,  with  admission  rates,  length  of 
stay,  and  overall  occupancy  falling  in  the  nation's  hospitals,  the  issue 
of  excess  capacity  has  taken  on  added  importance  from  the  perspective 
of  reducing  hospital  costs.  This  results  from  the  now  widely  observed 
phenomenon  of  hospitals  attempting  to  compete  with  each  other  to  fill 
beds — often  at  the  risk  of  unnecessary  hospitalizations — and  from  the 
costs  of  carrying  overhead  expenses  on  unfilled  beds.  Several  states  have 
recently  published  studies  showing  that  as  much  as  one  third  of  their 
bed  supply  is  unneeded.'^^  As  a  result,  the  states  are  taking  action  to 
remove  hospital  beds  through  a  series  of  legislative  proposals  that  involve 
redeveloping  hospital  capital  into  other  uses,  pubhc  ''buy-outs"  of  ex- 
isting hospital  debt,  and  exemptions  to  antitrust  laws  in  order  to  en- 
courage mergers  and  consolidations  between  hospitals.' 


107 


^^^See  Jolly,  supra  note  43. 

'°^See  generally  Ohio  and  Maryland  Commission  reports,  supra  note  95. 

'""See  Intergovernmental  Health  Policy  Project,  supra  note  4. 


948  INDIANA  LAW  REVIEW  [Vol.  19:919 

The  market  approach  involves  several  states  moving  to  payment 
mechanisms,  principally  for  Medicaid,  that  revolve  around  fixed  unit 
prices  for  given  diagnoses.  Similar  to  the  federal  diagnostic  related  group 
(DRG)  system  of  payment  recently  imposed  by  Medicare,  state  Medicaid 
programs  are  looking  to  the  unit  price  system  as  a  means  of  forcing 
hospitals  to  cut  their  costs  or  suffer  financial  loss  in  treating  the  Medicaid 
population.  In  a  similar  vein,  some  states  have  promoted  health  main- 
tenance organizations  (HMO's)  as  a  means  of  reducing  hospital  utili- 
zation. In  Wisconsin,  for  example,  a  plan  to  put  state  workers  into 
HMO's  has  stimulated  rapid  development  of  similar  organizations  in  the 
state.  io« 

The  final  observation  related  to  state  hospital  rate  regulation  regards 
the  role  of  the  federal  government  in  the  development  of  future  state 
initiatives  in  this  area.  In  the  past,  the  federal  government  has  encouraged 
state  efforts  at  controlling  the  hospital  marketplace  principally  through 
Medicare  waivers.  As  mentioned,  under  this  authority  the  federal  gov- 
ernment cedes  to  certain  rate-setting  states  the  power  to  establish  the 
rate  at  which  Medicare  pays  hospitals  for  treatment  of  the  Title  18 
population.  Currently,  however,  continuation  of  the  waivers  in  the  four 
states  that  qualified  seems  tenuous,'"^  and  the  granting  of  new  waivers, 
although  recently  encouraged  by  Congress,  seems  less  and  less  Hkely 
under  the  current  Administration.  Fundamentally,  the  Reagan  Admin- 
istration has  opposed  Medicare  waivers  on  the  basis  that  they  encourage 
regulatory  solutions  to  social  problems  and  represent  the  inevitable  ex- 
pansion of  government. 

In  response,  several  new  state  rate-setting  laws,  such  as  that  of 
Maine, '''^  ehminate  the  need  for  Medicare  participation  in  the  regulatory 
scheme.  Thus,  Medicare  is  '*carved  out"  and  does  not  participate  in 
the  otherwise  all-payer  nature  of  the  system.  As  a  result,  hospitals  treating 
Medicare  beneficiaries  must  operate  within  the  DRG  payment  limits  for 
these  patients,  while  all  other  payers  operate  at  the  rates  established  by 
the  state.  Under  this  system.  Medicare  cannot  participate  in  savings  that 
accrue  to  other  payers,  and  hospitals  might  make  substantial  profits 
from  the  Medicare  population,  at  least  in  the  initial  years  of  the  federal 
DRG  system.  Increasingly  states  will  attempt  to  avoid  bringing  the  federal 
government  into  their  plans  for  controlling  hospital  costs  both  because 
the  federal  government  is  hostile  to  such  state  initiatives  (something  of 
an  irony  given  the  interest  the  current  Administration  has  in  state  par- 
ticipation in  other  issues),  and  because  the  states  are  discovering  that 
the  systems  can  operate  adequately  without  Medicare  participation. 


'°^See  generally  Andreano,  Wisconsin  Health  Care  Reforms  Blend  Tighter  Regulation 
and  Competition,  Bus.  &  Health,  Jan. /Feb.  1984,  at  47. 

'""See  Washington  Report  on  Medicine  and  Health,  Oct.  29,  1984,  at  38. 
"°Me.  Rev.  Stat.  Ann.  tit.  22,  §  381  (West  Supp.  1986). 


1986]  COST  CONTAINMENT  949 

V.     Afterword 

What  makes  for  success  in  the  legislature  has  little  to  do  with 
successful  administration  of  its  product,  namely,  a  policy  initiative  em- 
bodied in  statute.  If  the  legislative  effort  is  to  yield  a  successful  solution 
to  the  ultimate  problem,  the  statutory  scheme  and  the  legislative  intent 
must  be  transformed  into  a  properly  functioning  agency  and  program. 
Necessarily,  the  legislature  must  enact  statutes  that  embody  the  best 
contemporary  thinking  about  the  problem  and  its  solution. 

However,  the  best  laws  do  not  assure  an  acceptable  solution  to  the 
problem.  A  good  example  of  the  difference  between  statute  and  per- 
formance exists  in  the  comparison  of  the  Maryland  and  Washington 
statutes  and  their  success  in  containing  hospital  costs.  The  Maryland 
statute  was  enacted  in  1971  and  provided  for  comprehensive  control  of 
all  hospital  budgets  in  the  state.'"  Shortly  after  its  enactment,  the 
Washington  legislature  passed  a  bilP'^  modeled  on  the  Maryland  law, 
incorporating  all  of  the  features  of  the  Maryland  drafters.  After  a  decade 
of  experience,  Maryland's  agency  was  able  to  point  to  statistically  sig- 
nificant reductions  in  hospital  cost  inflation  and  overall  budgets,'*^  while 
no  significant  effect  on  costs  was  discernible  in  Washington  throughout 
the  period.""^ 

The  absence  of  effect  in  the  one  state  and  success  in  the  other 
suggest  only  that  the  system  envisioned  in  the  law  itself  is  not  the 
controlling  essential.  It  merely  points  up  the  importance  of  several  factors 
which  are  necessary  to  make  hospital  cost  control  a  reality.  The  first, 
obviously,  is  continuing  commitment  on  the  part  of  the  legislature  to 
the  importance  of  the  issue.  Second,  once  the  delegation  by  the  legislature 
is  complete,  the  more  important  factor  is  the  support  of  the  state's 
executive.  Continuous  reinforcement  by  the  governor  is  necessary  if  the 
agency  is  to  be  protected  from  the  enormously  powerful  political  forces 
concerned  with  the  administration  of  the  regulatory  system.  Third  is  the 
independence  of  the  agency;  good  appointments  by  the  governor  and 
insulation  from  political  pressure  are  requisites  for  an  effective  imple- 
mentation of  the  legislature's  intention.  Finally,  and  of  overwhelming 
importance,  is  the  presence  of  a  strong  and  professional  staff  for  the 


'"1971  Md.  Laws  627  (codified  as  amended  at  Md.  Health-Gen.  Code  Ann. 
§§  19-201  to  19-220  (Supp.   1985)). 

"'1973  Wash.  Laws  ch.  5  (codified  as  amended  at  Wash.  Rev.  Code  Ann.  §§  70.39.030- 
70.39.910  (West  1975  &  Supp.   1986)). 

"'Coelen  &  Sullivan,  An  Analysis  of  the  Effects  of  Prospective  Reimbursement 
Programs  on  Hospital  Expenditures,  Health  Care  Fin.  Rev.,  Winter  1981,  at  1;  Cohen 
&  Colmers,  ReViews:  A  State  Rate-Setting  Commission,  1  Health  Aff.  99  (1982).  But 
see  Mitchell,  Issues,  Evidence,  and  the  Policymaker's  Dilemma,  1  Health  Aff.  84  (1982). 

'"'C/'.  Coelen  &  Sullivan,  supra  note  113. 


950 


INDIANA  LA  W  REVIEW 


[Vol.  19:919 


agency.  Without  a  skilled  and  politically  neutral  staff,  the  rate-setting 
experiment  will  not  succeed. 

The  foregoing  analysis  underscores  the  observation  of  one  analyst 
that  "good  people  cannot  make  a  bad  law  work,  just  as  bad  people 
cannot  make  a  good  law  work."  Good  laws  are  necessary  to  give  force 
to  a  strong  rate-setting  program,  and  public-spirited  people  of  deter- 
mination must  be  encouraged  to  administer  the  will  of  the  people  as 
expressed  through  the  legislature. 


APPENDIX 

FIGURE  1 . 

PERCENTAGE  CHANGE  SINCE  1972 
N  EXPENSE  PER  ADMISSION  (ADJUSTED) 


1974 


LEGEND:   MEAN  REGULATED  6   MEAN  NONREGULATED  45 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 


1986] 


COST  CONTAINMENT 


951 


FIGURE  2. 


ANNUAL  PERCENTAGE  CHANGE  IN 
EXPENSE  PER  ADMISSION  (ADJUSTED) 


25 


20 


15- 


10 


5- 


— I r 

1983    1984 


1972    1973    1974    1975    1976    1977    1978    1979    1980    1981    1982 

YEAR 


LEGEND:   CONNECTICUT  UNITED  STATES 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 

FIGURE  3. 

ANNUAL  PERCENTAGE  CHANGE  IN 
EXPENSE  PER  ADMISSION  (ADJUSTED) 


25 


20 


15- 


10 


1972 


1973    1974    1975    1976    1977    1978    1979    1980    1981    1982    1983    1984 


YEAR 


LEGEND:   MARYLAND   UNITED  STATES 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 


952 


INDIANA  LA  W  REVIEW 


[Vol.  19:919 


FIGURE  4. 


ANNUAL  PERCENTAGE  CHANGE  IN 
EXPENSE  PER  ADMISSION  (ADJUSTED) 


25 


20 


15 


10 


0- 


1 — 

1974 


1972 


1973 


1975 


1976 


1977 


1978 


YEAR 


1979 


1980 


I 
1981 


1982    1983 


1984 


LEGEND:   MASSACHUSETTS  UNITED  STATES 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 

FIGURE  5. 

ANNUAL  PERCENTAGE  CHANGE  IN 
EXPENSE  PER  ADMISSION  (ADJUSTED) 


1972 


1973 


1974 


1975 


1976 


1977 


1978 


YEAR 


1979 


1980 


1981 


1982 


1983 


1984 


LEGEND:   NEW  JERSEY  UNITED  STATES 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 


1986] 


COST  CONTAINMENT 


953 


FIGURE  6. 


ANNUAL  PERCENTAGE  CHANGE  IN 
EXPENSE  PER  ADMISSION  (ADJUSTED) 


25- 


20- 


15- 


10 


5- 


0- 


T 1 — 

1972    1973 


1974    1975    1976    1977    1978    1979    1980    1981    1982    1983 

YEAR 


1984 


LEGEND:   NEW  YORK UNITED  STATES 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 

FIGURE  7. 

ANNUAL  PERCENTAGE  CHANGE  IN 
EXPENSE  PER  ADMISSION  (ADJUSTED) 


25 


20 


15 


10- 


5- 


0- 


T — 1 — ! 1 i 1 \ 1 1 1 1 1 r 

1972    1973    1974    1975    1976    1977    1978    1979    1980    1981    1982    1983    1984 

YEAR 


LEGEND:   WASHINGTON   ■  UNITED  STATES 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 


954 


INDIANA  LAW  REVIEW 


[Vol.  19:919 


FIGURE  8. 


TOTAL  OPERATING  MARGIN 


YEAR 


LEGEND:   MEAN  REGULATED  6   MEAN  NONREGULATED  45 

JOHNS  HOPKINS  CENTER  FOR  HOSPITAL  FINANCE  AND  MANAGEMENT 


Liver  Transplantation  in  Massachusetts: 
Public  Policymaking  as  Morality  Play* 

Clark  C.  Havighurst** 
Nancy  M.  P.  King*** 

In  1982,  Jamie  Fiske,  the  infant  daughter  of  Mr.  and  Mrs.  Charles 
Fiske  of  Massachusetts,  was  dying  of  congenital  liver  disease.  Her  death 
was  imminent,  except  for  the  possibility  that  a  liver  transplant — a  dif- 
ficult, risky,  and  extremely  costly  surgical  procedure  considered  by  many 
authorities  still  to  be  experimental — could  prolong  her  hfe,  for  months 
or  years,  under  a  Ufetime  regimen  of  drugs  to  prevent  her  body's 
natural  rejection  of  the  foreign  tissue.  No  surgeons  or  hospitals  in 
Massachusetts  performed  liver  transplants  at  the  time.  Moreover,  the 
Massachusetts  Blue  Cross  and  Blue  Shield  plans  (MBCBS),  the  family's 
health  insurers,  advised  the  Fiskes  that  such  an  experimental  procedure 
would  not  be  covered  under  their  policy. •  Thus  begins  the  complex 
morality  play,  * 'Liver  Transplantation  in  Massachusetts." 

In  addition  to  the  Fiskes,  the  players  in  this  drama  include:  two 
state-appointed  commissions,  composed  of  prominent  citizen-experts;  the 
state  Department  of  Public  Health;  the  state  Medicaid  program;  MBCBS 
and  Blue  Shield's  president,  John  Larkin  Thompson;  and,  as  a  kind  of 
Greek  chorus,  the  omnipresent  media.  The  role  of  ''identified  life"^  is 


♦Support  for  the  research  reflected  in  this  article  was  provided  under  Grant  No.  HS 
05326  from  the  National  Center  for  Health  Services  Research  and  Health  Care  Technology 
Assessment,  U.S.  Department  of  HeaUh  and  Human  Services.  The  authors  are  indebted 
to  personnel  of  the  Massachusetts  Department  of  Public  Health  and  Blue  Cross  of 
Massachusetts  and  to  members  of  the  Task  Force  on  Organ  Transplantation  for  their 
generous  help  in  facilitating  access  to  information  and  documents  and  for  submitting  to 
interviews.  Conversations  with  numerous  individuals,  most  of  which  are  cited  herein, 
greatly  assisted  the  authors  in  forming  their  impressions  of  liver  transplantation  in  Mas- 
sachusetts. The  interpretations  offered  here  are  of  course  not  necessarily  shared  by  those 
who  assisted  the  authors  or  participated  so  conscientiously  in  the  policymaking  effort. 
** William  Neal  Reynolds  Professor  of  Law,  Duke  University.  A.B.,  Princeton  University, 
1955;  J.D.,  Northwestern  University,  1958. 

***Instructor,  Department  of  Social  and  Administrative  Medicine,  University  of  North 
Carolina  at  Chapel  Hill.  B.A.,  St.  John's  College,  1975;  J.D.,  University  of  North  CaroHna 
at  Chapel  Hill,  1980. 

'Because  the  Fiskes  had  initially  been  guaranteed  coverage  for  the  transplant  by  an 
MBCBS  employee,  the  Blues  eventually  agreed  to  pay  for  Jamie's  treatment  even  though 
the  procedure  was  technically  excluded  from  plan  coverage. 

The  special  function  of  characters  Uke  Jamie— endangered  individuals  whose  jeop- 
ardy could  be  relieved  by  heroic  or  extraordinary  governmental  action— in  dramas  of  this 
kind  has  been  observed  by  numerous  critics.  Interestingly,  many  if  not  most  of  these 
critics  have  been  Harvard  professors  and  citizens  of  Massachusetts.  See,  e.g..  Fried,  The 
Value  of  Life,  88  Harv.  L.  Rev.  1415  (1969);  Fuller,  The  Case  of  the  Speluncean  Explorers, 
62  Harv.  L.  Rev.  616,  623  (1949);  Schelling,  The  Life  You  Save  May  Be  Your  Own, 

955 


956  INDIANA  LA  W  REVIEW  [Vol.  19:955 

played  by  Jamie  Fiske,  whose  plight  precipitated  a  dramatic  medical 
rescue  and  who  has  so  far  lived  as  happily  ever  after  as  her  circumstances 
permit.  Absent  from  the  play,  even  as  off-stage  voices  like  the  unborn 
children  in  Die  Frau  ohne  Schatten,^  are  the  "statistical  lives"  that 
policymakers  reputedly  find  easier  to  ignore  than  identified  hves  in 
allocating  public  resources. "^ 

The  action  takes  place  under  the  full  glare  of  publicity.  The  setting, 
the  Commonwealth  of  Massachusetts  between  1982  and  1985,  features 
a  highly  regulated  health  care  system  built  on  assumptions  that  were 
common  in  the  1960's  and  1970's  but  that  are  not  universally  embraced 
in  the  United  States  today.  To  understand  the  plot  of  this  drama,  it  is 
helpful  to  recognize  that  the  political  ethos  of  Massachusetts  envisions 
a  true  health  care  ''system"  governed  centrally  in  accordance  with  exphcit 
public  choices.  Thus,  although  Jamie  Fiske' s  fate  was  not  directly  in 
the  hands  of  the  Commonwealth,  the  state  government  seemed  to  view 
itself  as  responsible  for  seeing  that  nothing  so  pubUcly  heart-rending 
could  happen  again. 

This  review  of  the  Massachusetts  experience  with  liver  transplantation 
treats  it  as  a  case  study  of  how  a  centrally  controlled  health  care  system 
faces  difficult  choices  concerning  health  care  and  health  care  technology. 
Despite  its  many  special  features,  the  problem  of  liver  transplantation 
is  not  sui  generis.  Health  care  abounds  with  similar  questions  concerning 
marginal  trade-offs  between  benefits  and  costs.  Although  few  of  them 
are  as  visible  or  as  fraught  with  the  characteristics  of  "tragic  choices"^ 
as  organ  transplantation,  the  basic  dilemma  of  whether  to  spend  scarce 
resources  to  achieve  a  particular  health  benefit  of  possibly  less  than 
commensurate  value  is  always  the  same.  The  choice  of  decisionmaking 
mechanisms,  pubhc  or  private,  through  which  to  address  these  inescapable 
trade-offs  has  been  the  fundamental  problem  of  health  poHcy  in  the 
United  States.^ 

in  Problems  in  Public  Expenditure  Analysis  127  (S.  Chase  ed.  1968);  Zeckhauser, 
Procedures  for  Valuing  Lives,  23  Pub.  Pol'y  419,  447,  458-59  (1975);  see  also  Evans, 
Health  Care  Technology  and  the  Inevitability  of  Resource  Allocation  and  Rationing 
Decisions,  pts.  1  &  2,  249  J.  A.M. A.  2047,  2208  (1983);  Friedman,  Rationing  and  the 
Identified  Life,  Hosps.,  May  16,  1984,  at  65;  infra  text  accompanying  notes  37-43. 

^A  well-known  operatic  fantasy  by  Richard  Strauss  and  Hugo  von  Hofmannsthal. 

*See  generally  Havighurst,  Blumstein,  &  Bovbjerg,  Strategies  in  Underwriting  the 
Costs  of  Catastrophic  Disease,  Law  &.  Contemp.  Probs.,  Autumn  1976,  at  122,  140-45; 
see  also  supra  references  cited  note  2  and  infra  text  accompanying  notes  37-43. 

The  term  is  Guido  Calabresi's.  See  generally  G.  Calabresi  &  P.  Bobbitt,  Tragic 
Choices  (1978).  Tragic  choices  arise  in  situations  where  no  decision  can  be  satisfying 
because  any  choice  necessarily  sacrifices  one  or  more  irreconcilable  fundamental  values. 
Scarcity  is  the  fundamental  condition  that  necessitates  such  choices.  Not  all  choices  are 
tragic,  of  course,  and  markets  are  usually  tolerated  to  allocate  mundane  goods  and  services. 
Where  the  opportunity  cost  of  a  particular  choice  includes  a  highly  visible  possibility  of 
a  lost  life  or  other  personal  tragedy,  however,  its  potentially  tragic  character  appears. 

^See  generally  Havighurst  &  Blumstein,  Coping  with  Quality /Cost  Trade-offs  in 
Medical  Care:  The  Role  of  PSROs,  70  Nw.  U.L.  Rev.  6,  9-45  (1975). 


1986]  LIVER  TRANSPLANTATION  957 

American  society  as  a  whole  is  somewhat  less  committed  than  Mas- 
sachusetts to  centralized  decisionmaking  on  questions  of  what  health 
services  should  be  provided.  Indeed,  although  the  enactment  of  Medicare 
and  Medicaid  in  1965  started  a  seemingly  inexorable  movement  toward 
such  centralization  of  authority  in  government  hands,  recent  years  have 
seen  a  distinct  movement  in  the  opposite  direction,  particularly  in  federal 
policy.^  Despite  the  promise  of  this  new  poHcy  and  some  signs  that 
hopes  for  it  are  being  rewarded,  it  is  still  not  clear  that  private  choices 
can  effectively  ration  expensive,  potentially  hfesaving  therapies  or  that 
such  rationing,  if  effective,  would  be  acceptable  politically.  Many  believe 
that  effective  and  acceptable  rationing  can  be  achieved  only  by  having 
government  assume  direct  or  indirect  control  of  technology  and  health 
care  spending.  Although  the  Massachusetts  experience  with  liver  trans- 
plants provides  no  answers  to  these  policy  questions,  it  yields  some 
insights  into  the  relative  merits  of  both  approaches.^ 

I.  Act  One 

Jamie  Fiske's  father  successfully  pleaded  her  need  for  a  transplantable 
organ  (and  financial  assistance)  before  the  entire  country,  leading  to  a 
successful  transplant  at  the  University  of  Minnesota  in  November  1982. 
As  a  direct  result  of  Jamie's  case  and  the  publicity  it  attracted,  several 
things  happened  back  home  in  Massachusetts.  Several  hospitals  in  Boston, 
all  of  them  nationally  prominent  research  and  tertiary  care  centers,  began 
expressing  an  interest  in  undertaking  liver  transplants.  Other  candidates 
for  transplant  surgery  began  appearing  and  pressing  for  financial  support 
for  the  expensive  lifesaving  therapy.  Such  developments  immediately 
focused  attention  and  pressure  on  state  government,  because  Massachu- 
setts hospitals  were  not  free  to  offer  the  service  without  a  "determination 
of  need"  (DON)  by  state  health  planners^  and  because  the  state  Medicaid 
program  was  one  of  the  payers  being  asked  to  cover  the  cost.  In  addition, 
although  MBCBS  were  private  entities,  they  were  finding  it  difficult  both 
on  medical  grounds  and  as  a  public  relations  matter  to  insist  that  liver 
transplantation  was  still  "experimental"  and  therefore  not  covered  by 
their  insurance  contracts.   MBCBS  were  hopeful  that  the  state  would 


''See  generally  Market  Reforms  in  Health  Care  (J.  Meyer  ed.  1983);  Havighurst, 
The  Changing  Locus  of  Decisionmaking  in  the  Health  Care  Sector,  11  J.  Health  Pol, 
Pol'y  &  h.  691  (1986). 

Tor  other  studies  providing  insight  on  technology  assessment,  rationing,  and  tragic 
choices  in  different  health  care  settings,  see  generally  H.  Aaron  &  W.  Schwartz,  The 
Painful  Prescription  (1984)  (describing  the  rationing  of  health  care  in  the  United  Kingdom); 
Institute  of  Medicine,  National  Academy  of  Sciences,  Assessing  Medical  Technol- 
ogies (1985);  Minnesota  Coalition  on  Health  Care  Costs,  The  Price  of  Life:  Ethics 
and  Economics  (Dec.  1984)  [hereinafter  Minnesota  Coalition  Report];  Office  of  Tech- 
nology Assessment,  Medical  Technology  Under  Proposals  to  Increase  Competition 
IN  Health  Care  (1982). 

^Mass.  Gen.  Laws  Ann.  ch.   Ill,  §  25B  (West  1977). 


958  INDIANA  LAW  REVIEW  [Vol.  19:955 

take  the  heat  either  for  denying  the  service  or  for  authorizing  it  and 
the  higher  insurance  premiums  needed  to  pay  for  it.  Under  these  cir- 
cumstances, the  Commonwealth  government  did  the  predictable  thing — it 
appointed  a  commission.'" 

A.   The  Fineberg  Task  Force  and  Report 

The  Liver  Transplantation  Task  Force  (LTTF),  which  was  created 
in  December  1982,  was  charged  by  the  Commissioner  of  Public  Health 
with  the  task  of  discussing  several  issues,  including  the  question,  "Should 
this  type  of  program  and  procedures  be  encouraged  or  permitted?"" 
Notably,  this  charge  directly  raised  the  fundamental  question  of  whether 
the  state  should  allow  livers  to  be  transplanted  at  all.  It  envisioned  a 
range  of  possible  postures  for  the  state,  from  prohibition  to  neutrality 
to  active  encouragement.  Although  outright  suppression  of  either  research 
on  a  new  technology  or  use  of  a  technology  once  developed  would,  in 
practice,  raise  serious  political  and  legal  questions,  the  LTTF  was  never- 
theless asked  to  recommend  what  state  policy  ought  to  be. 

The  LTTF's  report,  known  as  the  Fineberg  Report, ^^  was  issued  in 
May  1983.  It  described  liver  transplantation  as 

a  technically  feasible,  extreme  and  expensive  procedure,  de- 
monstrably capable  of  extending  the  lives  of  some  patients  near 
death,  and  with  substantial  uncertainties  about  optimal  selection 
of  patients,  appropriate  criteria  for  excluding  other  patients, 
optimal  matching  of  donor  organs  and  recipients,  effectiveness 
under  conditions  of  more  widespread  use,  and  the  extent  of 
benefits  and  costs. '^ 

The  report  recommended  that  liver  transplants  in  Massachusetts  be  Hmited 
to  one  adult  and  one  pediatric  program  with  extensive  data  to  be  gathered 
from  these  programs  in  order  to  clarify  the  numerous  "uncertainties" 
it  had  identified.'"^  The  LTTF  viewed  both  this  data  gathering  and 
systematic  evaluation  of  the  procedure  as  vitally  important. 


'"This  commission  was  the  Liver  Transplantation  Task  Force  (LTTF),  which  was 
created  in  December  1982. 

"Letter  from  Alfred  L.  Frechette,  Commissioner  of  Public  Health,  Commonwealth 
of  Massachusetts,  to  Harvey  Fineberg,  Harvard  School  of  Public  Health  (Dec.  27,  1982) 
reprinted  in  Final  Report  of  the  Task  Force  on  Liver  Transplantation  in  Massa- 
chusetts B1-B2  (May  1983). 

'TiNAL  Report  of  the  Task  Force  on  Liver  Transplantation  in  Massachusetts 
(May  1983)  [hereinafter  Fineberg  ReportI  (known  as  the  Fineberg  Report  after  the  chairman 
of  the  LTTF,  Harvey  Fineberg  of  the  Harvard  School  of  Public  Health). 

'Ud.  at  34. 

'"Id.  at  36,  40-41.  The  report  also  recommended  that  liver  transplantation  be  initiated 
under  a  special  one-year  DON  exemption,  so  that  the  data  gathered  by  the  new  programs 
could  be  evaluated  before  a  final  DON  determination  was  made.   Id.   at  39-40.   In  a 


1986]  LIVER  TRANSPLANTATION  959 

In  addition,  the  Fineberg  Report  provided  extensive  cost  estimates 
on  liver  transplantation,  derived  largely  from  data  supplied  by  MBCBS.*^ 
It  identified  eleven  cost  components,  ranging  from  preoperative  expenses, 
surgery,  and  follow-up  to  the  costs  of  complications,  including 
rehospitalization  and  additional  transplants.^^  It  concluded  by  estimating 
that  the  average  cost  per  Massachusetts  patient  surviving  one  year  after 
the  transplant  would  be  $238,800. '^  The  report  candidly  acknowledged 
that  some  of  its  assumptions  may  have  reduced  the  reliability  of  this 
estimate,  noting  that  it  took  hospital  charges  to  reflect  true  resource  costs 
and  ignored  both  indirect  economic  effects  and  "potential  savings  at- 
tributable to  averted  medical  expenses"  incurred  in  caring  for  a  dying 
patient.'*  The  report's  completeness  and  candor  on  these  points  were  un- 
precedented; they  serve  to  highlight  the  shortcomings  of  other  prominent 
studies  and  the  great  need  for  better  data  gathering.'^ 

The  LTTF's  average  total  cost  figure  obscures  the  possibility  that 
the  marginal  or  incremental  cost  of  a  transplant  may  be  considerably 
less.  Based  on  the  observation  that  transplantation  could  be  undertaken 
in  Massachusetts  hospitals  without  adding  equipment  or  personnel,  the 
LTTF  concluded  that  hospitals  undertaking  transplantation  should  be 
required  to  do  so  within  their  respective  current  cost  ceilings  under 
Massachusetts'  system  for  regulating  hospital  revenues. ^^  Under  this  rec- 
ommendation, a  hospital  could  receive  no  additional  funds  by  virtue  of 
adding  a  liver  transplantation  program  and  would  thus  have  to  finance 
its  involvement  from  any  surpluses  it  might  earn  or  by  economizing  on 
(or  terminating)  the  provision  of  other  services.  It  appears  that  the  LTTF 
judged  liver  transplantation  to  have  so  little  proven  value  to  date  that 
new  public  or  private  outlays  for  it  were  not  warranted.  A  payment 
restriction  was  one  of  several  methods  by  which  the  LTTF  hoped  to 
achieve  a  "controlled  dissemination  of  liver  transplantation  in  Massa- 
chusetts" until  more  data  on  its  efficacy,  cost,  and  desirability  were 
collected. ^' 

Although  this  decisive  call  for  caution  seemed  to  stem  from  strong 
reservations  about  the  value  of  the  new  technology,  the  Fineberg  Report 
stopped  short  of  addressing  the  most  fundamental  question  raised  in  its 
charge.  Admitting  great  discomfort  in  addressing  the  question  of  whether 
liver  transplantation  should  take  place  at  all,  the  LTTF  passed  the  buck. 

thoughtful  discussion  estabUshing  the  need  for  this  data  gathering,  the  report  described 
liver  transplantation  as  being  somewhere  "on  the  continuum  between  'experimental'  and 
'established.'  "  Id.  at  8. 

''Id.  at  25. 

'"•Id.  at  27. 

''Id. 

''Id.  at  29. 

''Id.  at  30. 

^°Id.  at  39-40. 

^'Id.  at  35. 


960  INDIANA  LA  W  REVIEW  [Vol.  19:955 

Declaring  itself  "not  legitimately  constituted  to  render  these  views  on 
behalf  of  society,  "^^  the  LTTF  asked  the  Commissioner  of  Public  Health 
to  "appoint  a  broadly  representative  advisory  body  to  consider  the 
difficult  value  judgments  about  whether  society  can  and  should  support 
liver  transplantation  and  to  what  degree.  "^^  Hidden  in  this  response,  it 
should  be  noted,  is  an  affirmation  of  the  assumption  that  a  single  choice 
for  "society"  as  a  whole  is  necessary  and  appropriate  and  that  this 
choice  should  be  made  by  a  committee  in  the  first  instance  and  ultimately 
by  political  processes.  By  recasting  the  question  to  focus  on  whether 
society  should  "support"  transplantation,  the  LTTF  seemed  to  eliminate 
the  possibility  that  transplantation  would  be  expressly  forbidden.  It  is 
also  possible,  however,  that  the  LTTF  simply  recognized  that  the  reg- 
ulatory blanket  covering  Massachusetts  hospitals  was  so  stifling  that  a 
decision  not  to  "support"  transplantation  was  tantamount  to  prohibiting 
it. 

B.   The  Regulatory  Setting 

The  specific  occasion  for  creating  the  LTTF  was  an  application  by 
New  England  Deaconness  Hospital  to  the  Department  of  Public  Health 
for  an  exemption  from  state  DON  requirements  that  would  allow  a  small 
number  of  liver  transplants  in  1983.^^  On  further  inquiry,  the  Department 
found  that  the  Massachusetts  General  Hospital,  Children's  Hospital,  and 
the  New  England  Medical  Center  were  also  prepared  to  perform  liver 
transplants.^^  It  was  hardly  surprising  that  Boston's  internationally  prom- 
inent research  hospitals  were  eager  to  perform  liver  transplants  after  the 
publicity  given  to  Jamie  Fiske's  ordeal. 

Like  those  of  other  states,  Massachusetts'  certificate-of-need  program 
(known  as  DON)  makes  capital  expenditures  and  substantial  changes  of 
service  subject  to  approval  by  state  authorities.^^  Such  regulatory  pro- 
grams, the  adoption  of  which  was  at  one  time  required  by  federal  law,^^ 
were  established  in  an  effort  to  curb  the  proliferation  and  expansion  of 
health  care  facilities  so  that  growth  would  correspond  to  officially  pro- 


^^Id.  at  31.  The  LTTF's  reservations  about  its  competency  were  based  on  the  fact 
that  it  was  composed  predominantly  of  scientists. 

^^Id.  at  42. 

^See  Letter,  supra  note  11.  Several  interviews  confirmed  the  identity  of  the  institution 
in  question. 

^'These  four  hospitals  supplied  the  LTTF  with  much  of  its  information  about  the 
feasibility  of  liver  transplantation  in  Massachusetts.  See  Fineberg  Report,  supra  note  12, 
at  app.  D. 

^^Mass.  Gen,  Laws  Ann.  ch.  Ill,  §  25B  (West  1977). 

^The  Health  Planning  and  Resources  Development  Act  of  1974,  Pub.  L.  No.  93- 
641,  93  Stat.  606  (1974)  (codified  in  scattered  sections  of  42  U.S.C),  made  the  availability 
of  certain  federal  funds  conditional  on  the  enactment  of  a  certificate-of-need  program 


1986]  LIVER  TRANSPLANTATION  961 

jected  needs. ^^  The  Massachusetts  DON  statute  and  regulations  give 
especially  broad  authority  to  the  Department  of  Public  Health  to  de- 
termine whether  a  '^substantial  change  in  services"  is  needed,^^  and  it 
was  apparently  conceded  that  a  hver  transplantation  program  needed 
state  approval  under  this  provision.  The  immediate  reason  for  commis- 
sioning the  Fineberg  Report  was  to  assist  the  Department  in  the  DON 
process. ^^  Without  affirmative  action  by  the  Commonwealth,  Boston's 
research  hospitals  would  be  barred  from  performing  liver  transplantation. 

For  interested  hospitals,  getting  a  DON  was  only  the  first  regulatory 
hurdle.  Massachusetts  places  a  ceiling  on  hospital  expenditures  through 
its  "all-payer"  Maximum  Allowable  Cost  (MAC)  system.^'  Under  this 
system  of  revenue  limits,  each  acute  care  hospital's  annual  operating 
budget  ceiling  is  determined  in  advance  by  the  state,  and  the  hospital 
is  then  permitted  to  collect  revenues  necessary  to  cover  its  anticipated 
needs  from  Medicare,  Blue  Cross,  and  private  insurers,  roughly  in  pro- 
portion to  the  number  of  beneficiaries  treat ed.^^  Instituted  in  1982,  the 
MAC  program  assures  each  hospital  prospectively  that  it  will  receive 
payments  reflecting  its  actual  1981  costs  plus  adjustments  for  inflation, 
exceptions,  and  certain  other  factors."  The  provision  for  exceptions 
permits  a  hospital  to  seek  additional  revenues  to  cover  the  anticipated 
costs  of  approved  new  services,  such  as  liver  transplants,  and  capital 
and  operating  expenses  associated  with  other  DON's.^'* 

Naturally,  any  hospital  receiving  a  DON  to  begin  performing  hver 
transplants  would  also  wish  to  receive  payment  for  them  under  a  MAC 
exception.  Under  the  Fineberg  Report's  recommendation,  however,  the 


meeting  certain  standards.  The  federal  compulsion  has  recently  been  relaxed.  See  Dere- 
gulation Is  Growing  Trend  for  State  CON  Programs,  Alpha  Centerpiece,  Feb.  1986,  at 
1.  Pending  legislation  would  make  state  participation  voluntary.  See  Health  Planning  Bill 
Passed,  44  Cong.  Q.  Weekly  Rep.  268  (1986). 

^«On  the  policy  underlying  certificate-of-need  laws,  see  generally  C.  Havighurst, 
Deregulating  the  Health  Care  Industry:  Planning  for  Competition  26-30,  54-63 
(1982);  Bovbjerg,  Problems  and  Prospects  for  Health  Planning:  The  Importance  of  In- 
centives, Standards,  and  Procedures  in  Certificate  of  Need,  1978  Utah  L.  Rev.  83,  84- 
97;  Havighurst,  Regulation  of  Health  Facilities  and  Services  by  "Certificate  of  Need,'' 
59  Va.  L.  Rev.   1143,  1148-69  (1973). 

^^Mass.  Gen.  Laws  Ann.  ch.  Ill,  §  25B  (West  1977);  Mass.  Regs.  Code  105,  § 
100.020  (1977). 

^"Fineberg  Report,  supra  note  12,  at  app.  B. 

"The  MAC  system  was  put  into  place  by  chapter  372  of  the  Massachusetts  Acts  of 
1982.  See  Mass.  Gen.  Laws  Ann.  ch.  6A  (West  Supp.  1985).  It  established  a  prospective 
payment  system  for  Medicaid  and  private  insurers,  modeling  the  approach  after  a  Blue 
Cross  hospital  payment  contract  already  in  use.  A  federal  waiver  made  the  state's  payment 
system  binding  on  the  Medicare  program.  Id. 

'^See  Mass.  Gen.  Laws  Ann.  ch.  6A,  §§  50-56  (West  Supp.   1985). 

''Id. 


962  INDIANA  LA  W  REVIEW  [Vol.  19:955 

exception  would  not  be  granted  and  the  hospital  would  have  to  finance 
the  service  out  of  savings  elsewhere.  Under  these  circumstances,  a  trans- 
plant candidate  with  an  insurer  willing  to  pay  for  the  procedure  might 
not  find  a  Massachusetts  hospital  willing  to  provide  it,  because  any 
hospital  revenue  from  treating  that  patient  would  have  to  be  offset 
by  reduced  revenue  from  treating  other s.^^  On  the  other  hand,  a  MAC 
exception  would  allow  the  hospital  to  cover  the  costs  of  transplants  by 
cost  shifting,  increasing  its  charges  to  the  various  payers  in  order  to 
pay  for  transplants  needed  by  patients  lacking  adequate  insurance. ^^ 

Under  these  regulatory  circumstances,  the  willingness  or  unwillingness 
of  payers  to  pay  for,  or  of  patients  to  buy  coverage  for,  such  procedures 
would  have  little  or  no  effect  on  whether  transplants  would  be  undertaken. 
This  decision  was  essentially  the  state's,  and  if  the  state  decided  to 
authorize  the  service,  the  public  would  pay  for  it  one  way  or  another. 
But  this  payment  would  not  necessarily  be  through  the  usual  method 
of  openly  levying  taxes  and  explicitly  appropriating  funds  for  worthy 
pubhc  projects.  The  Massachusetts  philosophy,  with  which  no  one  seems 
to  have  quarreled  throughout  this  episode,  is  apparently  that  the  state 
alone,  through  the  DON-MAC  process,  should  finally  dictate  such  mat- 
ters. The  state's  potential  role  in  frustrating  transactions  between  a  willing 
buyer  and  a  willing  seller  was  not  commented  upon.  As  will  be  seen, 
the  state  was  comfortable  with — though  perhaps  not  entirely  comfortable 
in — its  role  as  giver  or  withholder  of  lifesaving  medical  treatment. 

C   The  Political  Scene 

It  is  a  widely  noted  fact  of  our  political  life  that  when  an  individual 
human  life  is  placed  in  visible,  media-covered  jeopardy,  a  tug  on  the 
public  heart  strings  loosens  governmental  purse  strings,  causing  expend- 
itures to  save  that  "identified  life"  which  far  exceed  what  government 
is  wilhng  to  spend  to  save  an  otherwise  comparable  "statistical  life."^^ 
This  phenomenon  of  our  media-driven  democracy  can  be  viewed  in 
contrasting  ways.  It  is  either,  on  the  one  hand,  an  inexcusable  pandering 
to  public  passions  by  public  officials  freely  using  pubhc  funds  to  establish 
that  they  are  compassionate  and  deserve  re-election  or,  on  the  other 


"Freezing  the  resources  available  to  an  institution  places  responsibility  for  allocating 
those  resources  on  the  institution  and  its  physicians.  Decisions  may  not  reflect  the  public's 
priorities  because  internal  institutional  politics  allow  economic  interests  and  professional 
values  to  enter  the  picture.  See  Harris,  Regulation  and  Internal  Controls  in  Hospitals,  55 
Bull.  N.Y.  Acad.  Med.  88  (1979). 

^^The  MAC  system  effectively  breaks  most  of  the  links  between  the  private  insurance 
coverage  that  individuals  buy  and  the  care  they  receive.  Hospitals  are  free  to  provide  any 
of  the  myriad  of  services  authorized  by  their  DON  and  to  tax  the  cost  proportionately 
to  all  payers,  up  to  the  MAC  limit.  See  supra  note  35. 

"See  supra  notes  2,  4. 


1986]  LIVER  TRANSPLANTATION  963 

hand,  a  healthy  and  reassuring  affirmation  that  the  community  prizes 
each  individual  and  is  not  coldly  calculating  when  human  life  is  at  stake. 
Although  such  seemingly  inefficient  expenditures  may  be  defensible  be- 
cause they  give  the  community  a  chance  to  feel  good  about  itself,  it  is 
also  possible  that  they  cultivate  false  impressions  and  divert  attention 
and  resources  away  from  unfulfilled  obligations. 

Jamie  Fiske's  story  had  poignant  consequences  nationwide  and  il- 
lustrated the  dilemmas  that  government  faces  in  allocating  public  re- 
sources to  health  care  in  a  political  environment  that  demands  concern 
for  a  handful  of  identified  lives.  Following  Jamie's  transplant,  public 
and  private  financing  mechanisms  across  the  country  faced  strong  public 
pressure  to  cover  the  costs  of  the  procedure  for  other  individual  victims, 
frequently  children. ^^  The  pressure  was  particularly  acute  for  state  Med- 
icaid programs;  a  number  of  governors  and  legislatures  responded  by 
issuing  ad  hoc  directives  to  finance  highly  pubHcized  cases  with  state 
funds.  In  Missouri,  for  example,  the  legislature  specifically  authorized 
an  exceptional  payment  on  behalf  of  a  16-year-old  girl,  only 'to  reverse 
itself  the  following  week  when  two  things  happened:  additional  candidates 
appeared,  demonstrating  that  one  costly  symboHc  act  would  not  be 
enough  to  satisfy  the  media,  and  perhaps  consequentially,  such  private 
legislation  was  found  to  violate  the  state  constitution.^^ 

Nowhere  was  the  political  pressure  on  a  Medicaid  program  greater 
than  in  Massachusetts — the  home  of  Jamie  Fiske,  as  well  as  a  major  center 
for  biomedical  research  and  a  state  that  had  gone  very  far  in  accept- 
ing pohtical  responsibility  for  the  operation  of  the  health  care  enterprise. 
Massachusetts  Medicaid  declared  liver  transplants  reimburseable  for  eligi- 
ble persons  in  the  summer  of  1983.  From  then  until  January 
1984,  Massachusetts  was  in  the  anomalous  position  of  guaranteeing  to 
the  very  poor  an  extremely  costly  medical  procedure  that  was  not  available 
to  middle-class  MBCBS  subscribers.  Thus,  taxpayers  were  forced  to  buy 
for  others  transplants  which  they  had  not  yet  chosen  to  purchase  for 
themselves  through  insurance.  Although  MBCBS  was  also  under  pressure, 
it  was  able  as  a  private  entity  to  hold  out  longer.  This  experience  seems 
to  confirm  that  elected  officials  and  programs  accountable  to  them — even 
more  than  private  nonprofit  organizations  that  strive  to  be  perceived  as 
benign  dispensers  of  good  things — do  indeed  seize  opportunities  to 
demonstrate  their  compassion  by  spending  scarce  public  funds  irra- 
tionally.^o 

^^See,  e.g.,  Friedman  &  Richards,  Life  and  Death  in  a  Policy  Vacuum,  Hosps.,  May 
16,  1984,  at  79;  Wessell,  Medical  Quandary:  Transplants  Increase,  and  So  Do  Disputes 
Over  Who  Pays  Bills,  Wall  St.  J.,  Apr.  12,  1984,  at  1,  col.  1;  Rust,  Transplant  Successes 
Stir  Debate  on  Coverage,  Am.  Med.  News,  Oct.  21,  1983,  at  1. 

^^Friedman  &  Richards,  supra  note  38,  at  80. 

''°One  report  asserts  that  this  pattern  is  not  universal,  and  suggests  that  public  insurers 
are  on  the  whole  reluctant  to  cover  expensive  new  technologies.  Evans,  Transplant  Coverage: 


964  INDIANA  LA  W  REVIEW  [Vol.  19:955 

Undoubtedly,  Medicaid  dollars  allocated  to  transplants  could  have 
been  put  to  better  use  in  saving  statistical  lives  or  purchasing  *' quality- 
adjusted  Hfe  years. "^^  In  Cahfornia,  the  point  was  illustrated  most 
tellingly:  the  legislative  decision  to  pay  for  liver  transplantation  came 
at  the  same  time  that  the  legislature  decided  to  terminate  state  support 
for  its  medically  indigent  population,  those  who  cannot  afford  insurance 
for  their  own  health  care  but  are  not  deemed  poor  enough  to  warrant 
public  assistance/^  The  eagerness  of  public  officials  to  gain  credit  for 
their  humanitarianism,  especially  when  someone  else's  money  was  at 
stake,  was  revealed  even  in  the  White  House,  which  made  a  number 
of  dramatic  appeals  to  state  governments  and  private  payers  on  behalf 
of  particular  individuals.^^  These  scenes  of  elected  representatives  crowd- 
ing onto  the  stage  of  this  morality  play  left  to  the  audience's  imagination 
the  effects  of  government  policies  on  those  who  lacked  the  limehght.'^'^ 

D.   The  Private  Sector:  MBCBS 

Just  as  the  public  sector  felt  pressure  to  finance  transplants  for 
identified  patients,  private  insurers  all  over  the  country,  particularly  Blue 
Cross  plans,  found  themselves  making  difficult  case-by-case  decisions  in 
full  view  of  the  media.  MBCBS's  particular  problem  in  this  regard  was 


A  Public  Policy  Dilemma,  Bus.  &  Health,  Apr.  1986,  at  5.  As  the  Missouri  experience 
{see  supra  text  accompanying  note  39)  suggests,  government's  largess  will  stop  when  the 
costs  to  policymakers  exceed  the  political  benefits  of  being  associated  with  a  lifesaving 
effort. 

"'Expanding  Medicaid  ehgibility  and  coverage  of  preventive  services  would  be  obvious 
strategies.  See,  e.g..  President's- Commission  for  the  Study  of  Ethical  Problems  in 
Medicine  and  Biomedical  and  Behavioral  Research,  Securing  Access  to  Health 
Care:  The  Ethical  Implications  of  Differences  in  the  Availability  of  Heath  Services, 
19-20,  59-65,  79-90  (1983)  thereinafter  President's  Commission  Report]  (discussing  what 
ought  to  be  encompassed  by  "an  adequate  level  of  health  care"  available  to  all  citizens 
and  highlighting  current  problems  in  health  services  delivery).  On  the  use  of  "quality- 
adjusted  life  years"  as  a  way  of  assigning  priorities  to  public  investments  in  health  and 
safety,  see,  e.g.,  Zeckhauser  &  Shepard,  Where  Now  for  Saving  Lives?,  Law  &  Contemp. 
Probs.,  Autumn  1976,  at  5,   11-15. 

■'^Wessell,  supra  note  38. 

"^M;  see  also  Iglehart,  Transplantation:  The  Problem  of  Limited  Resources,  309  N. 
Eng.  J.  Med.  123,  126-27  (1983);  Meyer,  Transplant  Eunding:  A  Controversial  New  Area, 
Washington  Post,  Sept.   12,  1984,  at  C3,  col.   1. 

'^In  yet  another  demonstration  of  elected  officials'  felt  need  to  "do  something"  to 
respond  to  media  attention  to  the  transplantation  issue  and  to  get  media  attention  for 
themselves,  the  Massachusetts  legislature,  in  late  1983,  added  a  check-off  box  to  the  state's 
income  tax  returns  so  that  taxpayers  could  direct  that  a  portion  of  any  tax  refund  go 
into  an  organ  transplantation  fund.  In  1985,  when  the  checkoff  first  appeared  on  tax 
forms,  some  37,000  taxpayers  contributed  approximately  $187,000  to  the  fund,  which  will 
probably  be  used  primarily  to  help  pay  for  cyclosporin  and  other  follow-up  care  for 
transplant  recipients.  Interview  with  Joan  Gorga,  Dept.  of  Pubhc  Health,  Boston  (July 
1985). 


1986]  LIVER  TRANSPLANTATION  965 

not  solved  by  the  continued  failure  of  Massachusetts  regulators  to  au- 
thorize transplants,  because  insureds  could  still  request  treatment  out  of 
state.  For  this  reason,  MBCBS  did  not  oppose  the  effort  by  local  hospitals 
to  get  DON  approval  for  transplantation.  Indeed,  MBCBS  took  the  view 
that  if  they  were  going  to  have  to  pay  for  transplants  eventually,  it 
would  be  better  to  pay  for  in-state  procedures. "^^  They  anticipated  that 
the  MAC  system  would  control  the  incremental  cost  and  that  the  DON 
system  would  limit  the  number  of  facilities. "^^  Together  these  regulatory 
programs  might  restrict  the  capacity  and  the  incentives  of  the  system 
to  perform  more  than  a  few  procedures. 

For  the  time  being,  however,  MBCBS  were  reluctant  to  accept 
responsibility  for  paying  for  liver  transplants  anywhere.  According  to 
MBCBS  officials,  public  pressure  to  pay  for  liver  transplants  in  1982 
and  1983  was  enormous.  Although  they  did  not  wish  to  be  perceived 
as  denying  potentially  beneficial  care,  however  costly,  to  any  insured,'*^ 
the  plans  were  also  hesitant  to  waive  the  contractual  limitation  under 
which  they  were  obUgated  to  pay  only  for  generally  accepted  medical 
procedures.  One  reason  for  this  attitude  was  recognition  of  the  financial 
cost  which  transplants  would  impose  on  them  immediately  and  which 
would  have  to  be  built  into  future  premiums  charged  to  customers  already 
grumbling  about  high  insurance  costs. "^^ 

Another  explanation,  however,  had  to  do  with  MBCBS's  view  of 
their  precise  role  in  the  Massachusetts  system.  MBCBS  complained  that 
they  were  not  getting  clear  signals  from  their  usual  sources.  On  the  one 
hand,  there  were  the  pressures  from  the  media  and  the  example  set  by 
the  Medicaid  program.  On  the  other  hand,  the  health  care  system's 
central  decisionmakers  were  not  speaking  with  one  authoritative  voice. "^^ 
For  example,  in  1982  and  1983,  although  liver  transplants  were  gaining 
favor,  MBCBS's  medical  advisors  could  not  reasonably  declare  liver 
transplantation  to  be  accepted  therapy  covered  by  their  policies  because 
any  reasonable  chance  of  a  procedure's  success  depended  upon  use  of 
a  drug,  cyclosporin  A,  which  the  U.S.  Food  and  Drug  Administration 
(FDA)  considered  experimental  until  September  1983.^° 

Apparently  wedded  to  a  vision  of  themselves  as  mere  financing 
intermediaries  bound  to  give  effect  to  any  doctor's  prescription  made 


"•'Interviews  with  Douglas  Dickson,  Ombudsman,  and  James  Young,  M.D.,  Medical 
Director,  Massachusetts  Blue  Cross  (July  15,  1985);  see  also  Rust,  supra  note  38,  at  16. 

"•^Dickson  and  Young  interviews,  supra  note  45. 

''Id. 

"•^Wessell,  supra  note  38. 

"^Rust,  supra  note  38.  The  termination  of  the  National  Center  for  Health  Care 
Technology  in  a  1981  funding  cut  left  MBCBS  and  other  third-party  payers  without  the 
prospect  of  an  authoritative  governmental  opinion  on  which  to  base  their  payment  decisions. 

'"Food  &  Drug  Administration,  U.S.  Dep't  of  Health  &  Human  Services,  HHS 
News,  Pub.  No.  83-19  (Sept.  2,  1983). 


966  INDIANA  LAW  REVIEW  [Vol.  19:955 

according  to  policies  centrally  determined  by  professional  or  governmental 
decisionmakers,^^  MBCBS  preferred  to  rest  coverage  decisions  on  the 
actions  of  public  regulatory  agencies  such  as  the  FDA.  They  thus  resisted 
any  suggestion  that  they  should  embark  on  independent  assessments  of 
medical  treatments,  either  paying  for  something  officially  deemed  ex- 
perimental or  refusing  on  benefit/cost  grounds  to  pay  for  something 
that  enjoyed  professional  and  governmental  approval.  As  nonprofit  cor- 
porations together  constituting  the  dominant  health  insurer  in  Massa- 
chusetts, MBCBS  were  dependent  on  the  pubhc's  perception  of  them  as 
a  benign  source  of  financial  assistance  in  meeting  officially  recognized 
medical  needs.  The  Blues  were  beginning,  however,  to  see  the  high  cost 
and  difficulties  of  marketing  themselves  in  this  way. 

In  mid- 1983,  MBCBS's  arguments  for  not  paying  for  liver  transplants 
began  to  collapse.  In  May,  the  Fineberg  Report  called  liver  transplantation 
"cHnically  justifiable,""  and  in  June,  a  National  Institutes  of  Health 
consensus  conference  stated  that  "liver  transplantation  offers  an  alter- 
native therapeutic  approach  which  may  prolong  Ufe  in  some  patients."" 
When  these  lukewarm  semi-official  endorsements  of  liver  transplantation 
were  combined  with  media  attention  to  the  plight  of  transplant  candidates 
and  the  relative  willingness  of  other  insurers  and  Medicaid  to  pay  for 
liver  transplants,  they  seemed  to  leave  MBCBS  with  no  choice.  MBCBS 
had  to  discover  some  way  around  their  own  guidelines  or  be  perceived 
as  denying  treatment  solely  because  of  the  procedure's  high  cost.  The 
solution  that  MBCBS  hit  upon  was  to  offer  their  subscribers  a  Transplant 
Insurance  Program,  called  'TIP."^"*  By  this  means,  they  hoped  to  bridge 
the  gap  until  the  FDA  would  approve  cyclosporin  A,  which  would  allow 
MBCBS,  consistent  with  their  principles,  to  build  transplants  into  their 
basic  coverage  and  rates. 

TIP  was  a  separate,  optional  rider  offered  to  all  employment  groups 
or  ''accounts"  at  a  cost  of  55  cents  per  individual  or  $2  per  family  per 
month.  TIP  offered  full  coverage  for  heart,  heart-lung,  and  Hver  trans- 
plants, beginning  five  days  before  the  procedure  and  continuing  for 
twelve  months  thereafter. ^^  If  an  account  chose  to  purchase  TIP,  it  would 
be  mandatory  rather  than  optional  for  the  account's  insureds  or  "mem- 


'•For  complex  reasons,  private  health  insurers  have  long  denied  responsibility  for 
influencing  providers'  treatment  decisions,  relying  instead  on  professional  or  governmental 
decisionmakers  to  establish  what  services  should  be  paid  for.  See  Havighurst,  Explaining 
the  Questionable  Cost-Containment  Record  of  Commercial  Health  Insurers,  in  The  Po- 
litical Economy  of  Health  Care  (H.  Freeh  ed.  to  be  published). 

"Fineberg  Report,  supra  note  12,  at  2. 

"National  Institutes  of  Health,  Consensus  Development  Conference  Summary, 
Liver  Transplantation  (1983). 

'^See  Rust,  supra  note  38,  at  16-17. 

"Blue  Cross  &  Blue  Shield  of  Mass.,  "Special  Announcement:  New  Transplant 
Insurance  Plan"  (Sept.   1983)  [hereinafter  Special  Announcement]  (mailing  to  accounts). 


1986]  LIVER  TRANSPLANTATION  967 

bers."  Before  offering  TIP,  Blue  Cross  conducted  several  opinion  surveys 
to  determine  whether  the  public  pressure  they  were  feeling  would  actually 
translate  into  individual  choices  to  purchase  transplant  insurance.  These 
surveys  indicated  considerable  desire  for  such  insurance  on  the  part  of 
surveyed  individuals  and  families. ^^  However,  the  response  to  TIP  itself 
differed  significantly  from  the  response  to  the  surveys. 

TIP  was  offered  to  MBCBS  accounts  in  September  1983.  Although 
John  Larkin  Thompson,  president  of  Blue  Shield,  called  TIP  "the 
ultimate  referendum  on  whether  or  not  the  public  wants  to  pay  for 
these  operations, "^^  TIP  was  not  offered  directly  to  individual  members 
because  MBCBS  feared  the  effects  of  adverse  selection. ^^  It  was  left  to 
employers  to  act  for  their  insured  employees.  Conceivably,  publicity 
given  to  the  transplant  issue  placed  employers  in  a  political  position  vis- 
a-vis their  workers  that  was  not  dissimilar  to  that  of  MBCBS  and 
Medicaid  vis-a-vis  the  larger  public.  Not  wanting  to  appear  to  economize 
at  the  expense  of  employees  who  might  need  a  transplant,  employers 
may  have  been  more  wiUing  to  buy  TIP  than  the  employees  themselves 
would  have  been.  On  the  other  hand,  employers  might  be  reluctant  to 
buy  transplant  coverage  because  its  cost  might  be  perceived  as  difficult 
to  pass  on  to  employees. 

Each  account  was  sent  a  special  announcement  explaining  TIP,  which 
stated,  "The  public  has  indicated  its  desire  to  have  coverage  for  organ 
transplants."^^  The  announcement  was  clear  and  complete,  but  gave 
accounts  only  about  a  month  to  make  a  decision  whether  to  begin  TIP 
coverage  on  November  1.  It  left  them,  however,  the  alternative  of  picking 
it  up  at  their  regular  renewal  period  during  the  next  calendar  year. 

The  TIP  "referendum"  was  never  completed  because  MBCBS  dis- 
continued it  as  of  February  1,  1984.  Cyclosporin  A  had  actually  received 
FDA  approval  in  September  1983,6«  and  in  January  1984,  MBCBS's 
medical  advisory  committee  finally  recommended  that  liver,  heart,  and 
heart-lung  transplants  be  considered  medically  accepted  procedures.  These 
developments  allowed  transplantation  coverage  to  be  extended  to  all 
accounts,  with  a  premium  increase  roughly  equal  to  the  TIP  premium. 

In  contrast  to  the  results  from  MBCBS's  preHminary  surveys,  TIP 
did  not  prove  especially  popular  during  its  brief  marketing.  By  the  time 
it  was  discontinued,  only  7400  of  the  24,348  accounts  to  which  it  was 
offered  had  purchased  the  coverage,  7100  had  refused  it,  and  the  rest 


^^Dickson  interview,  supra  note  47. 

"Rust,  supra  note  38. 

^^Dickson  interview,  supra  note  47;  Interview  with  Dorris  C.  Commander,  Under- 
writing Manager,  Blue  Cross  of  Massachusetts  (July  1985). 

^^Special  Announcement,  supra  note  55. 

^FooD  &  Drug  Administration,  U.S.  Dep't  of  Health  &  Human  Services,  HHS 
News,  Pub.  No.  83-19  (Sept.  2,  1983). 


968  INDIANA  LAW  REVIEW  [Vol.  19:955 

— over  9800 — had  not  responded/*  Even  the  Massachusetts  Commissioner 
of  Insurance,  who  had  statutory  responsibility  to  act  as  the  account 
decisionmaker  for  MBCBS's  120,000  nongroup  subscribers  (includ- 
ing a  special  group  of  low-income  individually  insured),  had  failed  to 
make  a  decision  regarding  TIP  before  it  was  mooted."  There  are  many 
possible  explanations  for  the  modest  response  rate.  Some  accounts  may 
have  intended  to  pick  up  TIP  when  they  next  renewed  their  coverage. 
According  to  MBCBS,  however,  financial  considerations  probably  loomed 
largest  in  accounts'  decisionmaking.  In  addition,  some  accounts,  par- 
ticularly large  ones  based  in  more  than  one  state,  may  have  preferred 
to  pay  for  transplantation  in  different  ways  so  as  to  be  able  to  offer 
uniform  coverage  to  employees  in  all  states.  One  employer,  Honeywell, 
wanted  the  opportunity  to  approve  the  transplanting  facility. ^^  MBCBS 
were  much  more  interested  in  seeing  that  someone  other  than  themselves, 
preferably  the  state  through  DON,  would  be  responsible  for  approving 
facilities  and  quality  control. ^"^ 

At  MBCBS,  there  was  little  surprise  at  TIP's  poor  showing,  and 
the  perceived  reason  for  it  was  TIP's  cost.  Yet  no  thought  was  ever 
given  to  making  a  point  of  the  public's  apparent  indifference  to  transplant 
insurance  once  an  actuarially  fair  price  tag  was  attached.  Perhaps  MBCBS 
saw  no  difference  from  a  public  relations  standpoint  between  denying 
transplants  on  the  ground  that  the  procedure  was  experimental  and  telling 
an  individual  that  because  his  employer  had  rejected  the  TIP  offer,  he 
could  not  have  a  lifesaving  procedure  that  the  plan  was  providing  for 
others. 

In  any  case,  MBCBS  made  no  real  effort  to  examine  and  ponder 
the  significance  of  the  TIP  experiment.  Indeed,  they  were  quite  happy 
to  extend  their  regular  coverage  to  handle  transplants.  TIP  had  been 
complicated  and  cumbersom.e.  Because  it  constituted  a  separate  insurance 
program  with  a  separate  pool  of  funds,  TIP  required  a  lot  of  tracking 
to  separate  costs  attributable  to  the  transplant  from  ordinary  medical 
costs.  This  tracking  difficulty  led,  in  part,  to  the  *'five-days-before, 
twelve-months-after"  policy  under  which  all  medical  costs  incurred  within 
that  period  were  deemed  attributable  to  the  transplant.  Both  this  policy 
and,  later,  the  demise  of  TIP  sacrificed  Blue  Cross's  ability  to  extract 
easily  any  data  on  transplants.  All  transplant  data  now  go  into  the  files 
with  every  other  medical  procedure  and,  as  such,  are  entered  per  hos- 
pitalization rather  than  per  individual  insured;  cumulative  information 


^'Friedman  &  Richards,  supra  note  38,  at  79. 

*^Dickson  interview,  supra  note  47, 

"On  Honeywell's  transplant  coverage,  see  Minnesota  Coalition  Report,  supra  note 
9,  at  48;  Utah  Health  Cost  Management  Foundation,  Honeywell's  Transplant  Coverage 
Stresses  Cost  Containment,  Health  Cost  Management  Nev^s,  May  1985,  at  3. 

**Young  interview,  supra  note  47. 


1986]  LIVER  TRANSPLANTATION  969 

on  rehospitalization,  outpatient  care  costs,  and  related  other  costs  are 
difficult  to  retrieve. ^^ 

Although  apparently  efficient,  blending  transplant  coverage  into  a 
system  geared  only  to  paying  claims  and  not  to  evaluating  the  costs  and 
benefits  of  particular  procedures  may  be  a  false  economy.  It  is,  however, 
a  predictable  feature  of  a  health  care  system  in  which  private  insurers 
such  as  MBCBS  perceive  themselves  merely  as  executing  orders  from 
the  top.  MBCBS  throughout  this  episode  seemed  troubled  only  that  they 
were  unable  to  interpret  the  conflicting  signals  they  received.  Once 
transplants  crossed  the  threshold  of  acceptability  at  the  FDA,  the  NIH, 
the  LTTF,  and  the  DON  agency,  the  Blues  could  go  happily  back  to 
their  usual  business  of  forcing  consumers  to  buy  things  that  they  have 
had  no  real  opportunity  to  refuse. 

E.  Enter  the  Task  Force  on  Organ  Transplantation 

The  foregoing  events  left  Massachusetts  about  to  plunge  into  trans- 
plantation. Yet  a  number  of  problems  still  existed;  these  resulted  primarily 
from  the  way  in  which  the  DON  and  MAC  programs  articulated.  Simply 
granting  a  DON  without  increasing  the  MAC  allowance,  as  recommended 
by  the  Fineberg  Report,  would  give  rise  to  the  danger  that  hospitals, 
instead  of  cutting  back  on  indisputable  waste  to  finance  transplants, 
would  terminate  other,  more  essential  services,  creating  problems  through- 
out the  system.  For  example,  a  hospital  closing  a  maternity  service  and 
using  its  MAC  allowance  to  start  transplants  would  leave  its  obstetrical 
patients  to  burden  other  hospitals,  which  could  not  be  assured  of  increased 
MAC  allowances  to  provide  for  these  patients.  In  this  way,  the  threat 
of  sudden  introduction  of  a  costly  new  therapy  revealed  major  flaws  in 
the  state's  basic  faith  that  hospitals'  revenue  needs  could  be  predicted 
by  a  formula  without  creating  major  anomalies,  windfalls,  and  unfair- 
nesses. 

The  liver  transplant  challenge  also  revealed  faults  in  the  regulatory 
system.  Simply  granting  a  MAC  exception  on  the  theory  that  transplants 
had  now  become  just  another  accepted  therapy  would  mean  losing  the 
opportunity  to  ensure  that  the  procedure  was  being  used  appropriately 
and  that  information  on  its  safety,  efficacy,  and  cost  would  be  available 
for  subsequent  appraisal.  The  six-figure  price  tag  for  each  procedure 
made  it  clear  to  everyone  that  letting  the  system  treat  liver  transplants 
as  it  treats  virtually  everything  else  had  significant  fiscal  impUcations. 
It  of  course  occurred  to  no  one  to  question  publicly  whether  letting  the 
system  freely  prescribe  high  volumes  of  other  treatments  with  five-,  four-, 
three-,  and  even  two-figure  price  tags  might  also  be  socially  inappropriate 
or  wasteful.  Thus,  the  basic  belief  that  doctors  and  hopsital  employ 

"Commander  interview,  supra  note  58. 


970  INDIANA  LAW  REVIEW  [Vol.  19:955 

their  limited  resources  rationally  and  in  accordance  with  public  objectives, 
a  faith  on  which  the  entire  regulatory  system  was  built,  was  not  chal- 
lenged.^ Instead,  it  was  concluded  only  that  the  transplant  issue,  because 
it  had  met  the  public  eye  and  could  not  politically  be  ignored,  had  to 
be  addressed  with  greater  particularity.  Why  the  system  could  not  be 
trusted  here,  when  it  was  trusted  to  make  virtually  all  other  choices, 
was  never  made  clear. 

The  need  to  control  transplants  specially  loomed  so  large  that  another 
commission,  the  Task  Force  on  Organ  Transplantation  (OTTF),  was 
appointed.  This  new  task  force  had  a  broader  scope  than  the  earlier 
one.  It  was  charged  with  making  policy  for  heart  and  heart-lung  trans- 
plants as  well  as  hvers.^^  It  was  also  asked  to  provide  a  social  evaluation, 
not  just  a  technical  report.  As  the  next  act  of  our  morality  play  will 
show,  the  OTTF  was  equal  to  the  challenge  to  pronounce  on  the  largest 
questions  of  public  policy  in  health  care. 

II.  Act  Two 

The  OTTF  was  convened  in  October  1983,  by  the  Commissioner  of 
Public  Health  under  the  chairmanship  of  George  Annas  of  the  Boston 
University  School  of  Public  Health.  It  was  charged  "with  the  development 
of  standards  and  processes  for  evaluating  the  use  of  organ  transplan- 
tation."^^ The  question  expressly  left  unanswered  by  the  Fineberg  Report 
— whether  transplantation  should  "be  encouraged  or  [even]  permitted" — 
was  not  even  raised:  "The  work  of  the  Task  Force  can  be  categorized 
in  terms  of  the  when,  who,  what  and  how  of  organ  transplants."^^ 
Although  the  OTTF  did  hear  testimony  on  the  issue  during  its  meetings, ^^ 
the  objections  raised  concerning  whether  to  proceed  with  transplantation 
at  all  did  not  detain  OTTF  members  long.^^  The  political  climate  obviously 
precluded  a  firm  stance  against  the  new  technology. 


^See  supra  notes  35  &  36. 

^The  OTTF's  report  was  unclear  why  transplantation  of  bone  marrow,  kidneys,  and 
other  organs  was  not  treated  as  well,  but  in  stating  that  liver  and  heart  transplants  were 
"the  [only]  ones  currently  clamoring  for  wider  introduction,"  the  OTTF  confirmed  that 
its  inquiry  was  shaped  by  politics,  not  by  a  desire  to  rationalize  the  provision  of  all 
expensive  medical  care.  Report  of  the  Massachusetts  Task  Force  on  Organ  Trans- 
plantation (1984)  [hereinafter  OTTF  Report]. 

''Id.  at  3,  119  (app.  A). 

'''Id.  at  119  (app.  A). 

™Dr.  Alan  Sager  of  the  Boston  University  School  of  Public  Health  argued  before 
the  OTTF  that  "all  citizens  of  the  CommonweaUh  should  have  equal  access  to  all  effective 
care  now  routinely  available  before  the  range  of  therapies  is  expanded."  Testimony  of 
Alan  Sager  (Oct.  31,  1983). 

^'Interview  with  George  Annas,  OTTF  chairman  (July  1985).  The  recent  report  of 
the  National  Task  Force  on  Organ  Transplantation,  created  by  the  National  Organ  Transplan- 
tation Act,  Pub.  L.  No.  98-507,  98  Stat.  2339  (Oct.  19,  1984),  does  not  address  this  issue, 
simply  assuming  that  transplantation  of  all  kinds  should  be  covered  by  public  and  private 


1986]  LIVER  TRANSPLANTATION  971 

The  OTTF's  report,  the  recommendations  of  which  were  unanimous, 
was  released  in  October  1984,  although  preliminary  recommendations 
were  released  in  January. 

A.   The  OTTF's  Recommendations 

The  OTTF's  first  recommendation  advocates  the  introduction  of  liver 
and  heart  transplantation  "in  a  controlled,  phased  manner  that  provides 
the  opportunity  for  effective  evaluation  and  review  of  its  clinical,  social, 
and  economic  aspects  by  a  publicly-accountable  body  after  an  initial 
phase  of  2-3  years  of  limited  transplantation. "^^  This  position,  which 
sounds  and  may  well  have  been,  under  the  circumstances,  eminently 
reasonable,  was  almost  certainly  inevitable,  given  the  political  impossi- 
bility of  saying  "no"  to  transplants.  The  OTTF,  hke  the  LTTF  before 
it,^^  was  clearly  seeking  a  middle  ground  that  would  accommodate  the 
pressure  to  allow  transplants  but  not  open  the  door  to  unlimited  spending 
on  the  new  technology.  The  recommendation  of  a  later  evaluation  was 
necessary  to  preserve  the  appearance  that  the  procedure  was  still  in  an 
investigatory  or  probationary  stage.  As  the  Fineberg  Report  had  noted, 
however,  it  is  hard  to  stop  a  program  once  it  has  begun. ^"^ 

The  OTTF  conveyed  the  impression  that  its  unanimous  conclusions 
were  reached  by  rational  planning,  deep  thinking  by  academic  experts, 
and  a  collective  social  conscience.  There  is  also  the  possibility,  however, 
that  it  was  simply  compromising  conflicting  views,  accommodating  po- 
litical pressures,  and  rationalizing  the  result.  Although  the  charge  that 
the  OTTF's  actions  were  in  fact  "political"  might  be  taken  as  a  criticism, 
many  in  Massachusetts  would  no  doubt  say  that  because  the  conclusions 
flowed  from  an  open  process  and  a  representative  body,  the  legitimacy 
and  soundness  of  the  result  and  of  the  values  promoted  are  unchal- 
lengeable. Whether  such  faith  in  the  politics  of  interest-group  liberalism 
is  warranted  should  be  regarded  as  an  open  question,  however, ^^  and 
indeed  it  is  one  of  the  central  questions  inspiring  this  appraisal. 

The  OTTF's  second  recommendation  elaborates  on  the  first  by  em- 
phasizing that  transplantation  should  not  be  made  "generally  available" 
until  after  the  recommended  review  by  a  "publicly-accountable  body," 


financing  programs.  U.S.  Dep't  of  Health  &  Human  Services,  Public  Health  Service, 
Health  Resources  &  Services  Admin.,  Organ  Transplantation:  Issues  and  Recommen- 
dations (April  1986).  The  Minnesota  Coalition  Report,  noting  the  trend  to  coverage,  recom- 
mended that  it  "should  remain  optional  for  group  accounts;"  no  opinion  was  expressed 
on  public  plans'  policies.  Minnesota  Coalition  Report,  supra  note  8,  at  47-48. 

720TXF  Report,  supra  note  67,  at  10. 

^^See  supra  text  accompanying  notes  14  &  21. 

^'*Fineberg  Report  supra  note  12,  at  36. 

^'C/.  Havighurst,  More  on  Regulation:  A  Reply  to  Stephen  Weiner,  4  Am.  J.L.  & 
Med.  243,  247-49  (1980)  (disputing  claims  by  a  Massachusetts  advocate  of  regulation  that 
politicized  regulation  is  legitimized  by  the  democratic  process  and  should  be  immune  to 
general  criticism). 


972  INDIANA  LAW  REVIEW  [Vol.  19:955 

which  should  not  be  limited  to  assessing  the  technology's  status  as 
"experimental"  or  otherwise 7^  The  Report  also  makes  clear  that  in  the 
task  force's  view,  availability  is  synonymous  with  general  reimbursea- 
bility.^^  It  opines,  too,  that  general  availability  should  not  result  only 
through  the  state  Medicaid  program's  becoming  "the  de  facto  insurer 
for  all  such  procedures,"''^  by  virtue  of  inadequate  private  financing  and 
the  impoverishment  of  transplant  candidates.  To  prevent  this  result  and 
to  "ensure  fairness  in  the  distribution  of  burdens  regarding  reimburse- 
ment," the  Report  suggests  that  coverage  be  prescribed  by  a  "joint 
committee"  of  government  representatives  and  private  insurers.''^  Such 
a  body  might  violate  the  federal  antitrust  laws,  however,  unless  its 
decisions  were  embodied  in  official  government  action. ^° 

Recommendations  (3)  and  (4)  by  the  OTTF  introduce  the  issue  of 
costs.  During  the  evaluation  period,  authority  to  do  transplants  would 
be  granted  only  to  those  hospitals  that  agree  to  perform  them  within 
the  MAC,  with  an  exception  for  each  procedure  that  amounts  to  the 
costs  of  organ  procurement  and  cyclosporin.^'  This  attempt  to  force 
hospitals  to  finance  a  portion  of  the  cost  of  transplant  programs  by 
economizing  was  apparently  the  only  way,  even  in  this  heavily  regulated 
state,  in  which  the  volume  and  hence  the  overall  cost  of  transplants 
could  be  kept  down.  To  protect  against  the  concomitant  risk  that  trans- 
plantation would  displace  other  vital  services,  recommendation  (3)  sug- 
gests that  need  determinations  in  the  DON  program  be  made  only  upon 
a  showing  that  the  cost  of  adding  transplantation  can  be  borne  without 
sacrificing  more  desirable  services.  "As  a  principle,  the  Task  Force 
believes  that  if  it  turns  out  that  liver  and  heart  transplantations  take 
resources  away  from  higher  priority  health  care  services,  and  decrease 
their  accessibility  to  the  public,  then  transplantation  procedures  should 
not  be  performed. "^^ 

In  a  section  antecedent  to  its  specific  recommendations,  the  OTTF 
gives  its  final  word  on  how  to  prevent  a  modest  amount  of  costly 
transplantation  from  diverting  resources  from  essential  services: 


760TTF  Report,  supra  note  67,  at  11. 
''Id.  at  11-12. 

""Id. 

«°In  general,  the  Sherman  Act,  15  U.S.C.  §  1  (1983),  prohibits  collective  actions  of 
the  kind  that  are  taken  for  granted  in  centrally  governed  health  care  systems  as  a  useful 
adjunct  or  alternative  to  direct  government  control.  Although  the  McCarran-Ferguson  Act, 
15  U.S.C.  §  1001  (1983),  provides  a  partial  exemption  from  the  Sherman  Act  for  "the 
business  of  insurance,"  an  agreement  not  to  sell  a  certain  type  of  coverage  has  been  held 
to  fall  within  an  exception  to  this  exemption.  St.  Paul  Fire  &  Marine  Ins.  Co.  v.  Barry, 
438  U.S.  531  (1978). 

siQTTF  Report,  supra  note  67,  at  14.  Such  costs  would  amount  to  about  $9000 
per  heart  transplant  and  $44,000  per  liver.  Id. 

'Ud.  at  13. 


1986]  LIVER  TRANSPLANTATION  973 

[T]he  Task  Force  believes  that  these  procedures  should  be  per- 
formed on  [all]  those  who  are  likely  to  benefit  from  them,  so 
long  as  the  total  cost  is  controlled,  and  resources  are  not  diverted 
from  higher  priority  medical  procedures  to  liver  and  heart  trans- 
plantation. The  question  of  what  a  "higher  priority"  procedure 
is  will  be  based  on  the  total  number  of  individuals  affected, 
and  the  importance  to  their  lives  of  the  intervention.  For  example, 
it  may  be  appropriate  to  shut  down  an  underutilized  maternity 
program  to  do  organ  transplants.  The  burden  of  demonstrating 
that  such  a  tradeoff  is  appropriate,  however,  should  be  on  the 
hospital  proposing  it.  Accordingly,  in  the  [DON]  process,  all 
currently  available  health  care  services  should  be  presumed  to 
be  higher  priority  than  transplantation.  The  applicant  should 
have  the  burden  of  demonstrating  that  transplantation  has  a 
higher  priority  than  any  other  currently  available  health  care 
service  from  which  organ  transplantation  diverts  funds  and/or 
support  systems. ^^ 

Such  an  allocation  of  the  burden  of  proof  would  apparently  require  a 
hospital  to  prove  its  own  past  inefficiency  and  waste  of  public  resources 
in  order  to  quahfy  for  the  establishment  of  a  transplant  program;  a 
well-run  hospital  doing  only  things  highly  beneficial  to  patients  need  not 
apply.  Such  paradoxes  are  common  under  regulation.  Perhaps  the  crown- 
ing irony,  which  the  task  force  itself  notes  in  its  chapter  on  costs, ^'^  is 
that  transplantation  can  be  contemplated  in  Massachusetts  only  because 
much  of  its  high  cost  can  be  paid  out  of  waste  in  the  system — the  very 
thing  that  regulation  was  supposed  to  prevent.  The  presumption  that  the 
OTTF  created  against  the  displacement  of  existing  services  by  transplants 
can  hardly  be  taken,  in  context,  as  an  expression  of  faith  that  regulation 
has  in  fact  achieved  true  efficiency. 

Recommendation  (5)  addresses  patient  selection  criteria  and  would 
require  them  to  be  "public,  fair,  and  equitable"  and  based  initially  on 
medical  suitability  criteria  and  secondarily  on  the  principle  of  first-come, 
first-served,  in  the  event  demand  exceeds  the  supply  of  organs. ^^  For 
Massachusetts  residents,  the  ability  to  pay  should  not  be  a  factor,  nor 
should  social  class  or  family  support. ^^  The  report  suggests  an  "appeal 
mechanism"  to  ensure  fairness,  thereby  conjuring  up  a  vision  of  two  law- 
yers advocating  their  dying  cUents'  competing  claims  to  a  single  liver  before 
a  neutral  decisionmaker.  This  is  a  particularly  striking  example  of  how 
far  the  OTTF  would  go  to  ensure  that  the  state  appear  legalistically  fair 


"M  at  9,  10. 

^'Id.  at  60. 

^'Id.  at  16-17. 
'^Id. 


974  INDIANA  LAW  REVIEW  [Vol.  19:955 

in  dispensing  life  and  death. ^^  With  almost  equal  plausibility,  the  report 
could  have  required  that  patient  selection  reflect  *' affirmative  action" 
aimed  at  redressing  past  societal  injustices  toward  certain  groups. 

Finally,  recommendation  (6)  introduces  the  idea  that  heart  and  liver 
transplants  in  the  Commonwealth  should  be  undertaken  by  hospitals 
belonging  to  a  consortium  organized  to  share  data,  experience,  and 
resources. ^^  This  idea  apparently  did  not  originate  with  the  OTTF  because 
it  stated  that  there  is  no  economic  justification  for  beginning  organ 
transplantation  at  more  than  one  hospital,  but  that  if  more  than  one 
hospital  is  to  do  the  procedure,  there  must  be  a  truly  integrated  and 
cooperative  effort — a  "worthwhile  consortium."*^  The  consortium  con- 
cept had  appeared  earlier  in  a  staff  recommendation  by  the  Depart- 
ment of  Public  Health  in  connection  with  the  pending  DON  apph- 
cation.^  In  addition,  the  consortium  idea  was  dictated  in  part  by  the 
state's  refusal  to  grant  a  MAC  exception,  thereby  drastically  limiting 
the  number  of  procedures  that  any  one  institution  could  afford  to 
perform. 

Use  of  several  institutions  put  the  regulators  on  very  shaky  ground, 
however,  in  light  of  another  prime  goal  of  regulation — ensuring  the  quality 
of  care.  Because  it  is  widely  accepted  that  experience  improves  out- 
comes, the  Department  of  PubHc  Health  could  have  been  criticized 
if  it  authorized  several  hospitals  each  to  perform  less  than  the  optimal 
number  of  procedures  per  year.  The  consortium  concept,  if  it  allows 
experience  truly  to  be  shared,  overcomes  this  objection.''  Its  adoption 
in  Massachusetts,  however,  appears  to  have  been  only  a  face-saving  com- 
promise, necessitated  by  the  pohtical  unpopularity  of  giving  all  the  business 
to  one  institution.'^ 


«Tor  warnings  of  the  consequences  of  excessive  "due  process"  in  dealing  with 
sensitive  issues  of  this  kind,  see  Blumstein,  Constitutional  Perspectives  on  Governmental 
Decisions  Affecting  Human  Life  and  Health,  Law  &  Contemp.  Probs.,  Autumn  1976, 
at  231;  Havighurst,  Blumstein  &  Bovbjerg,  supra  note  4,  at  155-57.  For  scholarship 
approving  the  legalistic  approach,  see  J.  Katz  &  A.  Capron,  Catastrophic  Diseases: 
Who  Decides  What?  239-40,  246-48  (1975);  Note,  Due  Process  in  the  Allocation  of  Scarce 
Life  Saving  Medical  Resources,  84  Yale  L.J.   1734  (1975). 

880TTF  Report,  supra  note  67,  at  18-20. 

''Id. 

^Id.  at  app.  B. 

^'A  factitious  consortium,  however,  could  result  in  significantly  poorer  patient  out- 
comes. This  reasoning  was  the  substance  of  an  ultimately  unsuccessful  challenge  mounted 
by  the  OTTF's  chairman  to  the  later-proposed  Boston  heart  consortium.  See  Brief  for 
Appellant  at  10-13,  George  J.  Annas  Ten  Taxpayer  Group  v.  Department  of  Public  Health 
(Health  Facilities  Appeals  Board  argued  July  9,  1985)  (Project  No.  4-3306). 

^^George  Annas  has  described  the  consortium  concept  as  "primarily  a  political  issue 
.  .  .  grafted  onto  the  original  draft  of  the  Report  at  the  request  of  the  Commissioner  of 
Public  Health."  Annas,  Regulating  Heart  and  Liver  Transplants  in  Massachusetts:  An 
Overview  of  the  Report  of  the  Task  Force  on  Organ  Transplantation,  13  Law,  Med.  & 
Health  Care  4,  5  (1985). 


1986]  LIVER  TRANSPLANTATION  975 

The  consortium  approach  solved  problems  for  a  number  of  the  par- 
ticipants in  the  drama.  The  consortium  idea  was  initially  attractive  to  the 
Department  of  Public  Health  because  it  would  reheve  it  of  the  politically 
difficult  task  of  choosing  among  powerful  institutions.  MBCBS,  which 
took  credit  for  planting  the  seed  of  the  consortium  concept,  were  pro- 
bably hoping  to  avoid  having  to  select  among  or  oversee  competing 
hospitals  or  to  adopt  their  own  patient  selection  criteria.'^  The  four 
hospitals  seeking  authority  for  liver  transplants  had  figured  out  for 
themselves  the  advantages  of  a  united  front  both  in  seeking  a  DON^"*  and 
in  avoiding  possible  future  competition. 

B.   The  Egalitarian  Motif 

Perhaps  the  most  notable  feature  of  the  OTTF  report  is  its  strong 
emphasis  on  equahty  in  the  distribution  of  transplanted  organs.  Perceiving 
this  as  the  central  question  in  the  morality  play,  the  task  force  declaimed: 

On  the  issues  of  equity  and  fairness,  we  concur  with  the 
conclusions  of  the  President's  Commission  for  the  Study  of 
Ethical  Problems  in  Medicine:  society  has  an  ethical  obligation 
to  ensure  equitable  access  to  health  care  for  all;  and  the  cost 
of  achieving  equitable  access  to  health  care  ought  to  be  shared 
fairly.  Transplantation  of  livers  and  hearts  should  therefore  only 
be  permitted  if  access  to  this  technology  can  be  made  independent 
of  the  individual's  ability  to  pay  for  it,  and  if  transplantation 
itself  does  not  adversely  affect  the  provision  of  other  higher 
priority  health  care  services  to  the  public. ^^ 

A  literal  reading  of  the  italicized  lines  indicates  that  the  OTTF  not 
only  endorsed  the  provision  of  transplants  to  those  who  cannot  afford 
them,  but  also  took  the  startling  position  that  paying  patients  should 
be  denied  transplants  in  Massachusetts  until  such  time  as  every  equally 
needful  patient  could  get  one.  As  noted  earlier,  it  is  easily  within  the 
power  of  Massachusetts  regulators — without  actually  making  the  perfor- 
mance of  this  therapeutic  procedure  a  criminal  act^^ — to  prevent  a  dying 
patient  from  purchasing  a  transplant  with  his  own  money  from  will- 

^^ Young  interview,  supra  note  47. 

^"Some  members  of  the  OTTF  viewed  the  consortium  concept  with  suspicion,  con- 
sidering it  an  end  run  around  the  DON  process  that  permits  four  programs  rather  than 
just  one  to  perform  transplants  and  makes  it  easier  for  the  hospitals  to  demonstrate  that 
other  services  are  not  being  displaced.  Cf.  Brief  for  Appellant,  supra  note  91,  at  9-10 
(makes  this  argument  with  regard  to  the  proposed  heart  transplantation  consortium). 

^'OTTF  Report,  supra  note  67,  at  9-10  (emphasis  added). 

^^Outright  state  prohibitions  of  therapeutic  procedures  can  raise  a  constitutional  issue. 
E.g.,  Roe  V.  Wade,  410  U.S.  113  (1973)  (abortion);  Rogers  v.  State  Board  of  Medical 
Examiners,  371  So.  2d  1037  (Fla.  Dist.  Ct.  App.  1979)  (chelation  therapy).  Regulatory 
programs  having  comparable  effects  are  more  difficult  to  challenge  legally  but  should 
raise  similar  concerns. 


976  INDIANA  LA  W  REVIEW  [Vol.  19:955 

ing  providers.  The  OTTF  apparently  approved  the  use  of  the  state's 
prohibitory  powers  in  this  way  in  order  to  coerce  a  pubhc  desirous  of 
transplants  for  themselves  into  providing  them  for  everyone.  Probably, 
however,  the  task  force  never  expected  that  such  extortionate  use  of  the 
state's  regulatory  power  would  actually  be  necessary  to  effectuate  its  poHcy 
objective  of  equity  in  transplantation.^'' 

Although  the  OTTF  may  not  have  meant  what  it  said  about  with- 
holding transplants  from  paying  patients  as  an  inducement  to  the  pro- 
cedure's equitable  provision,  the  OTTF  was  clearly  unresponsive  to  the 
interests  of  those  citizens  who  would  not  require  the  state's  assistance 
to  finance  a  transplant.  Under  the  report's  recommendations,  transplants 
will  occur  only  on  the  state's  own  terms,  and  only  a  limited  number 
of  transplants  will  be  performed,  regardless  of  the  availability  of  organs. 
Because  recipients  of  these  few  procedures  must  be  selected,  some  patients 
who  could  and  would  pay  their  own  way  will  not  get  treated.^*  Yet,  if 
they  were  allowed  to  purchase  their  own  treatment  outside  the  MAC 
system,  there  would  be  no  diversion  of  resources  from  * 'higher  priority" 
health  care.  The  OTTF  appears  content  with  a  state  policy  that  could 
deny  a  transplant  to  a  dying  person  who  had  made  expHcit  financial 
provision  for  it.  The  best  explanation  for  this  complacency  in  the  face 
of  a  denial  of  lifesaving  medical  care  may  be  simply  that  the  OTTF 
members  had  lost  the  capacity  to  conceive  of  the  purchase  of  health 
services  as  a  private  matter.  If  so,  their  attitude  reveals  a  great  deal 
about  the  political  culture  of  Massachusetts  and  its  approach  to  health 
care. 


^^The  DON  for  the  liver  transplantation  consortium  had  already  been  granted  in 
January,  and  a  heart  transplantation  DON  was  issued  in  May.  Letter  from  Department 
of  Public  Health  to  Dr.  Richard  Nesson,  Brigham  and  Women's  Hospital,  May  16,  1984, 
reprinted  in  OTTF  Report,  supra  note  67,  at  129. 

^^The  OTTF  may  have  viewed  this  as  only  a  theoretical  danger.  It  may  have  expected, 
for  example,  that  all  medically  defensible  transplants  would  in  fact  be  provided.  Disa- 
greement is  likely,  however,  over  whether  a  particular  procedure  is  desirable  or  "indicated," 
and  it  is  well-documented  that  as  a  technology  improves,  the  medical  indications  for  its 
use  broaden.  See  Caplan,  Organ  Transplants:  The  Costs  of  Success,  Hastings  Center 
Rep.,  Dec.  1983,  at  23,  31.  The  OTTF  also  might  have  thought  that  anyone  who  could 
afford  the  procedure  could  also  afford  to  travel  out  of  state  to  get  it.  This  proposition 
holds  true,  however,  only  if  other  states  reject  a  Massachusetts-type  hostility  to  trans- 
plantation and  also  permit  outsiders  to  obtain  organs  and  if  the  patient's  ability  to  pay 
does  not  stem  from  the  purchase  of  health  insurance,  which  typically  does  not  cover  the 
many  additional  expenses  associated  with  out-of-state  treatments.  Although  the  OTTF  may 
have  had  reason  to  discount  the  risk  that  some  self-supporting  patients  would  be  denied 
desired  transplants,  its  report  expressly  recognizes  that  the  number  of  people  waiting  for 
transplants  might  exceed  the  number  of  procedures  that  could  be  done.  It  is  possible  that 
it  is  simply  not  fashionable  in  Massachusetts  publicly  to  express  concern  about  the  "right 
to  health  care"  of  anyone  except  the  poor. 


1986]  LIVER  TRANSPLANTATION  977 


C.  Denouement 

The  OTTF  Report  was  received  by  the  Pubhc  Health  Council  of 
the  Department  of  Public  Health  and  was  the  subject  of  a  public  hearing 
on  November  5,  1984.  The  council  unanimously  adopted  the  report's 
recommendations  as  official  policy  and  instructed  the  Department  to  use 
the  text  of  the  report  for  guidance  in  DON  proceedings.  The  current 
state  of  organ  transplantation  in  Massachusetts  appears  to  have  followed 
the  outlines  of  the  OTTF's  script.  There  are  questions,  however,  whether 
the  spirit  of  its  recommendations  has  been  observed  in  practice.  For 
example,  it  is  doubtful  that  hospitals  seeking  DONs  for  transplantation 
have  given  any  real  guarantee  that  "higher  priority"  services  will  not 
be  affected.  Also,  it  has  been  questioned  whether  the  consortium  is 
really  functioning  as  an  integrated  research  program  dedicated  to  col- 
lecting useful  data  for  later  evaluation  by  a  "publicly-accountable  body."^^ 
It  would  appear  that  the  drama  is  not  yet  over.*^° 


"^See  infra  note  117.  Both  the  OTTF  and  the  Department  of  Public  Health  con- 
templated a  later  evaluation  of  the  liver  transplantation  program  to  see  whether  higher 
priority  services  were  being  displaced  and  expected  that  the  data  collected  would  shed 
light  on  this  issue,  on  which  the  consortium  would  have  the  burden  of  proof.  The  first 
annual  report  of  the  consortium,  covering  January  26,  1984,  to  January  26,  1985,  was 
brief,  even  cursory,  and  seems  not  to  contain  the  data  required  by  the  DON,  let  alone 
data  that  could  prove  anything  about  displacement.  Boston  Center  for  Liver  Trans- 
plantation, 1984  Annual  Report  (1985).  Even  the  actual  costs  of  transplantation  per 
survival  year  are  impossible  to  calculate  from  the  report.  Patients'  rehabilitation  status  is 
only  sketchily  assessed,  and  no  data  are  supplied  as  to  the  basis  for  rejection  of  candidates 
or  the  current  health  status  of  those  rejected.  Id.  Without  comparative  outcomes,  it  is 
impossible  to  judge  the  procedure's  value  or  the  predictive  effectiveness  of  the  patient 
selection  criteria  used.  There  is  also  no  evidence  that  transplants  have  not  displaced 
desirable  services. 

Some  OTTF  members,  including  Chairman  George  Annas,  argue  that  the  coalition 
is  violating  at  least  the  spirit  of  its  DON.  Annas  interview,  supra  note  71.  The  Department 
of  Public  Health  seems  to  feel,  however,  that  because  the  data  collection  requirements 
for  livers  were  never  very  well  defined,  the  coahtion's  first  report  is  satisfactory,  Gorga 
interview,  supra  note  44.  At  a  recent  conference,  panelists  discussing  the  Massachusetts 
system — including  Pubhc  Health  Commissioner  Walker,  transplant  surgeon  Roger  Jenkins, 
OTTF  chairman  Annas,  and  economist  Marc  Roberts — disagreed  in  almost  every  particular 
regarding  whether  the  Department  and  the  consortium  were  doing  what  they  were  expected 
to  do.  Conference  on  Transplantation  and  Artificla.l  Organs:  Issues  Along  the 
Experiment-to-Therapy  Spectrum  (Nov.  1985).  The  lack  of  agreement  on  a  variety  of 
issues  suggests  that  the  apparent  consensus  surrounding  the  OTTF  Report  resulted  from 
a  failure  to  address  practical  issues  and  a  papering  over  of  potential  problems.  Indeed, 
at  the  conference  just  cited,  OTTF  chairman  Annas  labeled  the  OTTF  "a  quasi-Quixotic 
noble  failure."  Id. 

'°^At  present,  however,  the  even  more  complicated  debate  over  heart  transplantation 
in  Massachusetts  is  apparently  diverting  much  attention  from  the  liver  issue.  Gorga  interview, 
supra  note  44;  see  supra  note  91.  The  parties  to  this  debate  are  more  experienced  and 
sophisticated  than  they  were  at  the  time  of  the  liver  debate.  In  particular,  Massachusetts 
expects  to  employ  many  of  the  recommendations  developed  by  the  Battelle  Human  Affairs 


978  INDIANA  LAW  REVIEW  [Vol.  19:955 

III.  Reviewing  the  Performance 

Viewers  of  the  morality  play  "Liver  Transplantation  in  Massachu- 
setts" must  come  away  unsatisfied  but  instructed  in  the  difficulties  of 
putting  life-and-death  choices  on  the  poHtical  stage.  Perhaps  more  than 
any  other  state,  Massachusetts,  aided  and  abetted  by  a  powerful  intel- 
lectual community,  has  assumed  the  role  of  dominant  decisionmaker  in 
health  care  matters.  The  case  of  liver  transplantation  provides  a  unique 
test  of  the  abihty  of  at  least  one  model  of  a  monolithic,  highly  regulated, 
and  politicized  health  care  system  to  address  difficult  choices  involving 
expensive  medical  technology.  *°^ 

In  the  Massachusetts  system,  it  was  necessary  for  the  state  to  decide 
publicly  whether  to  allow  liver  transplantation  at  all,  and  the  action  of 
the  drama  was  ostensibly  about  the  making  of  this  choice.  Politically, 
however,  the  state  probably  never  really  had  the  option  of  rejecting 
transplants  once  major  research  institutions  resolved  to  perform  them 
and  the  media  concluded  that  access  to  them  was  the  right  of  every 
Commonwealth  citizen.  As  in  a  Greek  tragedy,  the  outcome  was  fore- 
ordained, and  the  characters  were  never  truly  free  to  alter  the  inevitable 
result.  It  is  in  the  nature  of  "tragic  choices"  that  once  they  become 
political,  they  are  driven  mainly  by  forces  beyond  the  power  of  individuals 
to  control  or  escape.'^  To  accept  the  decisions  emerging  from  the  black 
box  of  Massachusetts  state  government  as  appropriate  societal  choices 
is  to  ignore  not  only  the  previously-noted  questionable  features  of  the 
political  process,  but  also  the  shortcomings  of  regulation,  some  trou- 
blesome ethical  issues,  and  the  possible  availability  of  alternative  deci- 
sionmaking mechanisms. 

A.  Regulatory  Inadequacies 

Having  approved  transplants  in  principle,  the  Commonwealth  of 
Massachusetts  and  its  respective  task  forces  then  had  the  problem  of 


Research  Center.  See  R.  Evans*  National  Heart  Transplantation  Study;  Final  Report 
(1984)  (prepared  by  the  Battelle  Human  Affairs  Research  Center  for  Health  Care  Financing 
Administration,  DHHS,  Washington,  D.C.) 

^°^See  supra  note  8.  A  particularly  interesting  point  of  comparison  is  provided  by 
the  Minnesota  Coalition  Report  which,  as  the  product  of  a  private  organization,  is  much 
less  a  political  document  than  the  OTTF  report.  Minnesota  Coalition  Report,  supra 
note  8. 

'"^Keeping  such  issues  out  of  the  political  arena  is  itself  difficult.  As  a  societal  attempt 
to  resolve  the  tragic  choice  by  finessing  it,  this  strategy,  like  others,  is  apt  to  be  unstable 
precisely  because  it  sacrifices  important  values,  such  as  openness  and  explicitness.  Professor 
Calabresi  predicts  an  inevitable  and  continuing  oscillation  among  imperfect  solutions  as 
society  continually  reasserts  those  values  (equity,  efficiency,  freedom,  etc.)  that  are  being 
neglected  by  whatever  system  of  choosing  is  currently  in  place.  See  G.  Calabresi  &  P. 
Bobbitt,  supra  note  5,  at  195-99.  However,  whether  a  stable  system  can  be  designed  or 
happened  upon  without  explicit  policy  choice  is  an  empirical  question.  In  any  case, 
depoliticization  would  appear  to  be  a  vital  first  step  toward  possible  stability. 


1986]  LIVER  TRANSPLANTATION  979 

rationing  the  costly  procedure.  However,  the  Massachusetts  regulatory 
scheme,  despite  its  comprehensiveness  and  complexity,  provided  no  public 
mechanism  for  deciding  explicitly  how  often  and  under  what  circum- 
stances the  procedure  would  be  done.  As  one  protection  against  high 
costs,  the  task  forces  recommended  against  a  complete  pass-through  of 
expenditures  for  transplants,  thus  forcing  hospitals  to  look  elsewhere  for 
at  least  some  of  the  necessary  funds.  Under  the  state's  regulatory  control 
of  hospital  revenues,  virtually  the  only  way  for  a  hospital  to  generate 
such  funds  would  be  to  cut  back  its  other  activities.  The  OTTF's  response 
to  the  danger  that  transplants  would  displace  more  valuable  hospital 
services  was  to  instruct  the  DON  agency  to  withhold  approval  of  a 
transplantation  program  that  could  not  prove  that  only  relatively  wasteful 
activities  would  be  eliminated  in  order  to  accommodate  it.  As  a  regulatory 
standard,  this  requirement  was  highly  impractical  and  unrealistic, ^^^  but 
it  protected  the  task  force  against  the  criticism  that  it  had  authorized 
a  diversion  of  resources  to  lower-priority  uses. 

With  all  their  regulatory  paraphernalia,  Massachusetts  officials  lack 
the  statutory  powers  they  need  to  control  directly  the  volume  and  cost 
of  transplants.  As  to  these  and  all  other  medical  procedures,  the  state 
can  only  identify  institutional  providers  of  needed  services  and  control, 
in  a  rough  way,  the  total  resources  at  each  institution's  disposal.  Because 
these  powers  do  not  add  up  to  effective  control  of  medical  technology, 
the  level  of  transplantation  activity  in  Massachusetts  remains  ultimately 
in  the  hands  of  prestigious  doctors  and  hospitals,  subject  to  certain 
resource  constraints.  Although  limiting  the  resources  available  to  prov- 
iders can  control  aggregate  costs,  the  Massachusetts  MAC  controls  relate 
in  no  recognizable  or  rational  way  to  the  potential  benefits  or  costs  of 
any  particular  procedure.  Allocational  decisions  are  thus  left  in  providers' 
hands. ^^"^  Once  Massachusetts  is  satisfied  that  the  resources  used  in  organ 
transplantation  are  not  obtained  by  eliminating  "higher  priority"  health 
services  currently  being  provided,  it  permits  transplants  to  proceed  without 
regard  to  the  additional  possibility  that  those  resources  might  have  still 
other,  more  valuable  uses. 

Thus,  although  Massachusetts  has  made  it  appear  that  it  has  exercised 
statesmanlike  control  in  this  highly  publicized  area,  it  may  have  done 
nothing  more  than  give  certain  Boston  hospitals  the  green  light  to 
rearrange  institutional  priorities  to  facilitate  new  adventures  on  the  fron- 
tiers of  medicine.  The  main  constraint  on  these  institutions  is  the  risk 


'"See  supra  note  99.  Two  critics  of  the  OTTF's  burden-of-proof  recommendation 
for  DON  proceedings  have  said,  "[I]t  is  difficult  to  imagine  a  process  that  is  more 
conceptually  confining,  less  amenable  to  empirical  analysis,  and  more  open  to  subjective 
interpretation."  Overcast  &  Evans,  Technology  Assessment,  Public  Policy  and  Trans- 
plantation: A  Restrained  Appraisal  of  the  Massachusetts  Task  Force  Approach,  12  Law^, 
Med.  &  Health  Care  106  (1985). 

^^See  supra  note  36. 


980  INDIANA  LAW  REVIEW  [Vol.  19:955 

that  their  actions  will  offend  future  state  officials  or  the  '*publicly- 
accountable  body"  that  the  OTTF  recommended  to  evaluate  transplan- 
tation later  on.  The  implicit  threat  that  the  state  might  take  unspecified 
action  in  the  future  puts  the  participating  institutions  on  notice  that 
they  had  better  be  able  to  defend  their  use  of  resources  or  face  unpleasant 
consequences.  Such  is  life  in  a  centrally  managed  health  care  system, 
where  things  fortuitously  attracting  public  notice  receive  minute  attention 
while  well  enough  is  left  alone.  Politicization  of  transplantation  achieves 
control  for  its  own  sake  but  provides  little  assurance  that  resources  will 
be  put  to  their  best  use.  A  regulatory  system  that  purported  to  make 
all  the  necessary  allocational  choices  would  be  a  more  stifling  form  of 
regulation  than  even  Massachusetts  would  be  Ukely  to  tolerate. 

B.  Questions  of  Values 

Above  all,  Massachusetts  strove  for  ethical  high  ground  in  establishing 
its  position  on  liver  and  heart  transplants.  Yet  a  careful  reading  of  state 
policy  as  reflected  in  the  OTTF  report  reveals  a  willingness  to  countenance 
the  denial  of  transplants  to  paying  patients — not  out  of  any  paternalistic 
concern,  but  simply  because  some  other  person  in  comparable  condition 
could  not  afford  the  same  treatment.  Perhaps  it  was  the  prospect  of 
organ  shortages  and  bidding  wars  that  only  the  well-to-do  could  hope 
to  win  that  induced  the  OTTF  to  approve  the  denial  of  transplants  to 
paying  patients.  After  all,  the  question  of  how  to  ration  scarce  medical 
resources  has  long  inspired  ethicists  to  philosophical  debate,  ^"^^  and  the 
OTTF,  chaired  by  a  leading  participant  in  that  debate, ^^^  may  have 
assumed  that  it  had  been  convened  primarily  for  the  purpose  of  pre- 
scribing an  ethically  satisfying  system  for  rationing  scarce  organs. ^^^  The 


'°The  relevant  literature  is  voluminous.  For  general  sources,  each  of  which  itself 
draws  on  many  others,  see  N.  Daniels,  Just  Health  Care  (1985);  In  Search  of  Equity: 
Health  Needs  and  the  Health  Care  System  (R.  Bayer,  A.  Caplan  &  N.  Daniels  eds. 
1983);  H.  Smith  &  L.  Churchill,  Professional  Ethics  and  Primary  Care  Medicine 
(1986);  Childress,  Rationing  of  Medical  Treatment,  in  4  Encyc.  of  Bioethics  1414  (W. 
Reich  ed.  1978). 

^'^See,  e.g.,  Annas,  No  Cheers  for  Temporary  Artificial  Hearts,  15  Hastings  Center 
Rep.  27  (Oct.  1985);  The  Phoenix  Heart:  What  We  Have  To  Lose,  15  Hastings  Center 
Rep.  15  (June  1985);  Allocation  of  Artificial  Hearts  in  the  Year  2002:  Minerva  v.  National 
Health  Agency,  3  Am.  J.  Law  &  Med.  59  (1979). 

'°'The  OTTF's  apparent  eagerness  to  respond  to  that  charge  may  be  seen  in  its  failure 
to  consider  seriously  the  possibility  of  encouraging  the  sale  of  organs  by  families  of 
deceased  potential  donors  to  those  awaiting  transplants.  OTTF  Report,  supra  note  67, 
at  37.  A  market  for  organs  would  ehminate  shortages  and  the  need  for  rationing  systems 
to  allocate  a  limited  supply.  However,  instead  of  seeking  to  break  down  the  current 
cultural  taboo  against  the  buying  and  selling  of  body  parts,  see  the  National  Organ 
Transplantation  Act,  supra  note  71  (prohibiting  the  sale  of  organs  in  interstate  commerce), 
the  OTTF  took  the  easier  political  path.  Indeed,  it  may  have  welcomed  organ  shortages 


1986]  LIVER  TRANSPLANTATION  981 

OTTF  did  not,  however,  expressly  restrict  its  recommendations  to  sit- 
uations where  there  were  not  enough  organs  to  go  around.  As  it  appears, 
the  OTTF  was  entirely  comfortable  with  a  policy  that  would  force  self- 
supporting  transplant  candidates  to  join  (and  perhaps  die  in)  the  state- 
mandated  queue  even  if  an  adequate  number  of  organs  was  available. 

In  support  of  its  willingness  to  deny  transplants  to  paying  patients, 
the  OTTF  invoked  a  well-known  1983  report  by  the  President's  Com- 
mission for  the  Study  of  Ethical  Problems  in  Medicine  and  Biomedical 
and  Behavioral  Research. ^°^  Although  the  President's  Commission  did 
declare  that  society  has  an  ethical  obligation  to  guarantee  a  decent  level 
of  health  care  to  its  neediest  citizens, '^^  nowhere  did  it  indicate  that  it 
would  be  ethical  to  hold  the  wealthy  and  well-insured  sick  hostage  without 
treatment  until  society  honored  this  obligation.  Moreover,  the  President's 
Commission  clearly  stated  that  it  was  not  ethically  necessary  for  all 
citizens  to  receive  the  same  health  care.^'°  Thus,  it  certainly  laid  no 
foundation  for  the  Massachusetts  policy  of  forcing  all  transplant  can- 
didates to  take  their  chances  in  a  state-sponsored  life-and-death  lottery. 

The  OTTF  again  misrepresented  the  President's  Commission  in  citing 
its  report  as  authority  for  guaranteeing  procedures  as  costly  as  liver  and 
heart  transplants  to  persons  who  cannot  afford  the  insurance  necessary 
to  purchase  them.^'^  Although  recognizing  a  public  obligation  to  provide 
a  decent  minimum  level  of  health  services  to  all,  the  Commission  did 
not  fully  define  that  level  or  specify  what  services  should  be  included 
in  the  guaranteed  package.  Moreover,  there  are  numerous  reasons  why 
one  might  conclude  that  procedures  as  costly  as  liver  transplants  ought 
not  to  fall  under  society's  guarantee  until  the  nation  becomes  a  great 
deal  wealthier  and  has  met  a  great  number  of  other  needs,  including 
non-health  needs,  of  its  less  advantaged  citizens.''^  The  OTTF  seemed 


as  a  constraint  on  the  number  of  costly  procedures  and  as  an  excuse  for  implementing 
their  rationing  theories.  See,  e.g.,  OTTF  Report,  supra  note  67,  at  80,  83. 

The  shortage  of  organs  is  currently  being  addressed  by  donor  education  efforts, 
ranging  from  promoting  the  slogan  "Organ  Donors  Recycle  Themselves"  to  legislation 
requiring  hospitals  to  request  donations  from  families  of  potential  donors. 

'°^5ee  supra  text  accompanying  note  95  (citing  President's  Commission  Report,  supra 
note  41). 

'°^The  President's  Commission  Report  states  as  its  first  premise  that  "society  has  an 
ethical  obhgation  to  ensure  equitable  access  to  health  care  for  all,"  and  continues: 
"Equitable  access  to  health  care  requires  that  all  citizens  be  able  to  secure  an  adequate 
level  of  care  without  excessive  burdens."  President's  Commission  Report,  supra  note  41, 
at  4  (emphasis  added). 

''"Id. 

•"OTTF  Report,  supra  note  67,  at  74. 

"^As  the  President's  Commission  explains: 

[T]he  standard  of  adequacy  for  a  condition  must  reflect  the  fact  that  resources 

used  for  it  will  not  be  available  to  respond  to  other  conditions.  Consequently, 

the  level  of  care  should  reflect  a  reasoned  judgment  not  only  about  the  impact 


982  INDIANA  LAW  REVIEW  [Vol.  19:955 

to  conclude  that  the  mere  fact  that  transplants  may  save  lives  is  enough 
to  obligate  society  to  pay'^^ — despite  the  explicit  finding  that  at  $230,000  to 
$340,000  per  patient  surviving  one  year,  liver  transplants  were  several 
times  more  costly  than  the  most  costly  of  other  generally  accepted  medical 
treatments. ''"^  The  OTTF  thus  backed  itself  into  an  ethically  debatable 
position.  While  arbitrarily  treating  transplantation  as  being  so  valuable 
that  it  should  be  available  to  all,  it  also  declared  that  because  of  the 
expense,  only  those  transplants  that  could  be  financed  primarily  out  of 
system  waste  should  be  provided.  Thus,  the  OTTF's  desire  to  demonstrate 
its  and  Massachusetts'  commitment  to  providing  lifesaving  treatment  for 
all  led  it  to  restrict  transplants'  availability  to  all  patients,  including 
those  who  would  not  require  public  financing.  Such  a  policy  had  spe- 
cifically been  denounced  by  the  President's  Commission  as  "an  unac- 
ceptable restriction  on  individual  liberty. "^^^ 

Under  the  circumstances,  it  seems  probable  that  the  OTTF  and  the 
Commonwealth  were  more  concerned  with  performing  a  symboHc  act 
than  with  giving  the  poor  the  essentials  of  a  good  Ufe.  Indeed,  although 
the  OTTF  expUcitly  endorsed  the  equitable  distribution  of  transplantation 
as  an  available  means  of  "prevent[ing]  the  gulf  between  the  haves  and 
have  nots  from  widening,'"*^  the  primary  beneficiaries  of  the  transplant 


of  the  condition  on  the  welfare  and  opportunity  of  the  individual  but  also  about 
the  efficacy  and  the  cost  of  the  care  itself  in  relation  to  other  conditions  and 
the  efficacy  and  cost  of  the  care  that  is  available  for  them. 
President's  Commission  Report,  supra  note  41,  at  36;  see  supra  notes  41  &  70. 

"^The  OTTF's  conclusion  that  organ  transplantation  should  be  part  of  that  adequate 
level  of  care  is  apparently  justified  by  the  stated  pubhc  perception  that  transplantation 
is  "life-saving."  OTTF  Report,  supra  note  67,  at  5.  The  President's  Commission  Report, 
however,  does  not  contemplate  and  indeed  does  not  seem  geared  toward  addressing  the 
inclusion  of  extreme  and  expensive  technologies  in  the  guaranteed  minimum  level  of  care. 
For  example,  it  states: 

Society  will  reasonably  devote  some  resources  to  health  care  but  reserve  most 
resources  for  other  goals.  This,  in  turn,  will  mean  that  some  health  services 
(even  of  a  lifesaving  sort)  will  not  be  developed  or  employed  because  they  would 
produce  too  few  benefits  in  relation  to  their  costs  and  to  the  other  ways  the 
resources  for  them  might  be  used. 
President's  Commission  Report,  supra  note  41,  at  19. 

"^On  cost  figures,  see  OTTF  Report,  supra  note  67,  at  43-69.  These  figures  have 
been  criticized  as  excessive.  E.g.,  Overcast  &  Evans,  supra  note  102,  at  107.  See  supra 
text  accompanying  notes  17  &  20. 

"^President's  Commission  Report,  supra  note  41,  at  20;  see  also  id.  at  4,  18;  Pauly, 
Equity  and  Costs,  13  Law,  Med.  &  Health  Care  28  (1985).  A  better  reading  of  the 
President's  Commission  Report  surely  would  conclude  that  the  state  ought  to  ensure 
equitable  access  to  lower-cost,  higher-priority  services,  leaving  expensive  technologies  outside 
the  "decent  minimum"  but  available  for  purchase  by  those  who  choose  to  devote  personal 
resources  to  that  end. 

"^OTTF  Report,  supra  note  67,  at  75;  see  Pauly,  supra  note  115,  at  29.  The  OTTF 
surely  places  disproportionate  emphasis  on  catastrophic  health  care  as  a  way  to  rectify 
perceived  injustices  in  the  social  order.  It  is  open  to  challenge  not  only  by  those  who 


1986]  LIVER  TRANSPLANTATION  983 

policies  adopted  were  not  the  less  well-off  populations,  from  which  a 
few  transplant  candidates  might  come,  but  those  who  could  take  public 
credit  for  making  the  humanitarian  choice.  The  OTTF  members,  the 
pubUc  officials  involved,  and  the  citizens  of  Massachusetts  as  a  whole 
avoided  appearing  cold-hearted  and  uncaring  in  the  face  of  imminent 
death  by  symbolically  extending  lifesaving  assistance  to  a  handful  of 
afflicted  patients.  The  troubling  question  remains,  however,  whether  the 
Commonwealth  has  so  far  discharged  its  other,  perhaps  greater  respon- 
sibilities to  its  disadvantaged  citizens  that  those  basking  in  the  glow  of 
this  good  work  are  truly  entitled  to  feel  good  about  themselves. 

C.   The  Alternative  of  Off -Stage  Choices 

Whenever  tragic  choices  are  made  upon  a  public  stage,  it  is  probably 
inevitable  that  the  actors  will  play  to  the  audience,  sacrificing  some 
values,  particularly  allocative  efficiency,  in  order  to  be  seen  as  acting 
vigorously  in  the  defense  of  human  life.  Before  one  can  criticize  the 
performance  in  Massachusetts,  therefore,  it  is  necessary  to  ask  whether 
there  is  any  way  in  which  these  difficult  issues  could  have  been  resolved 
without  public  posturing  and  with  a  greater  expectation  that  resources 
would  not  be  used  in  pursuit  of  health  benefits  too  modest  to  justify 
the  outlays.  Can  the  role  of  politics  in  these  difficult  matters  be  limited? 
One  discussion  of  this  question  frames  the  challenge  as  follows: 


would  be  prevented  from  purchasing  transplants  but  also  by  the  have-nots  in  question, 
who  might  reasonably  choose  to  have  the  resources  applied  where  they  have  greater  need 
and  can  expect  greater  benefit.  It  appears,  however,  that  the  OTTF  had  a  larger  political 
agenda.  Chairman  Annas  has  acknowledged  as  much  in  responding  to  criticisms  such  as 
those  suggested  here: 

The  Task  Force  .  .  .  saw  its  charge  as  an  opportunity  to  express  our  views  on 
how  the  system  ought  to  work.  The  Task  Force  believed  that  fairness  and  equity 
are  critical  values  that  are  more  important  than  perpetuating  a  system  where 
only  the  rich  and  those  with  the  right  insurance  or  publicity  acumen  can  obtain 
transplants.  The  fact  that  we  have  not  tried  for  equity  and  fairness  elsewhere 
in  the  system  does  not  make  it  somehow  wrong  to  take  the  opportunity  we 
have  in  heart  and  liver  transplantation  to  try  to  introduce  equity  and  fairness 
in  the  real  world.  We  must  begin  somewhere.  Anywhere  will  entail  some  ar- 
bitrariness. But  the  symbolic  nature  of  transplantation,  and  its  ability  to  capture 
the  public's  attention  and  support,  commend  it  as  a  reasonable  place  to  begin. 
Far  from  presuming  "the  vahdity  of  the  status  quo,"  the  Task  Force  believed 
that  transplantation  provides  a  unique  opportunity  to  modify  some  of  the  the 
health  care  system's  fundamental  operating  assumptions. 
Annas,   The  Dog  and  His  Shadow:  A  Reply  to  Overcast  and  Evans,   13  Law,  Med.  & 
Health  Care   112,   113  (1985).  Annas's  visionary  goal  is,  however,  as  remote  as  ever. 
The  OTTF  Report's  passionate  concern  for  equity  ironically  succeeds  only  in  raising  to 
the  level  of  principle  the  political  preference  for  identified  over  statistical  lives,   while 
doing  little  to  clarify  the  debate  over  the  extent  to  which  government  should  guarantee 
the  provision  of  health  care  services. 


984  INDIANA  LAW  REVIEW  [Vol.  19:955 

[A]lthough  there  are  good  reasons  for  our  society  to  seek  to 
spare  its  individual  members  catastrophic  health  care  costs,  in 
doing  so  it  will  almost  inevitably  commit  more  resources  than 
it  really  wants  to  commit,  or  should  commit,  to  such  a  purpose. 
This  result  is  probable  because  government  will  find  it  difficult 
to  impose,  or  even  tolerate,  needed  limits  on  very  expensive 
medical  efforts  to  save  lives  and  preserve  health  without  seeming 
to  deny  the  sanctity  of  human  life.  The  challenge  is  thus  to 
design  social  institutions  which  neither  unduly  sacrifice  society's 
humanitarian  ideals  nor  overspend  on  medical  services  not  war- 
ranted by  the  benefits  they  yield.  .  .  .  [G]overnment  cannot 
safely  assume  too  central  a  role  in  decisionmaking  on  life-and- 
death  and  similar  issues  and  .  .  .  society  will  be  better  off  if 
institutional  arrangements  are  such  that  death  and  suffering  from 
catastrophic  disease  continue  to  be  perceived  as  "more  an  act 
of  God  than  of  the  legislature."  Careful  attention  to  program 
details  and  to  the  allocation  of  decisionmaking  responsibility  is 
necessary  if  society  is  to  succeed,  in  the  context  of  expanded 
protection  against  catastrophic  medical  expenses,  in  preserving 
both  humanitarian  values  and  democratic  government's  benign 
— if  not  its  beneficent — image. 


1  17 


The  quoted  study  "identifies  a  critical  need  to  keep  government's  profile 
low  in  order  to  facilitate  saying  'no'  when  it  is  appropriate  to  do  so" 
and  "seeks  to  help  government  limit  its  moral  as  well  as  its  financial 
exposure  while  honoring  a  substantial  commitment  to  assist  victims  of 
catastrophic  disease. "'^^ 

The  Massachusetts  performance  reviewed  here  casts  only  a  little  light 
on  the  possibility  that  government  can  be  removed  from  center  stage 
in  these  dramas  and  that  there  can  be  introduced  instead  the  deus  ex 
machina  of  an  unregulated,  demand-driven  market  for  health  services. 
The  foundation  of  the  Massachusetts  system  is,  after  all,  the  assumption 
that  regulation  is  essential  to  prevent  inefficient  growth  and  wasteful 
spending  on  health  services  of  all  kinds.  Although  there  was  a  time 
when  this  assumption  seemed  unchallengeable,  actual  reforms  in  some 
health  care  financing  mechanisms  have  recently  begun  to  reveal  the 
potential  of  private  purchasing  decisions  in  a  competitive  marketplace 
to  curb  the  excessive  flow  of  resources  into  the  health  care  sector  and 
to  confine  spending  to  activities  that  are  relatively  cost-effective. ^^^ 

"^Havighurst,  Blumstein  &  Bovbjerg,  supra  note  4,  at  XIZ-IA  (quoting  Artificial 
Heart  Assessment  Panel,  Nat'l  Heart  &  Lung  Inst.,  The  Totally  Implantable 
Artificial  Heart  247  (1973)  (separate  views  of  C.  Havighurst)). 

"»M  at  124. 

"'See,  e.g.,  Arnett,  Health  Spending  Trends  in  the  1980's:  Adjusting  to  Financial 
Incentives,  Health  Care  Fin.  Rev.,  Spring  1985,  at  1;  Davis,  Is  Cost  Containment 
Working?,  Health  Aff.,  Fall  1985,  at  81. 


1986]  LIVER  TRANSPLANTATION  985 

Certainly  what  is  known  about  the  efficacy  and  costs  of  Uver  trans- 
plantation does  not  suggest  that  only  irrational  or  impoverished  persons 
would  ever  choose  to  forgo  this  treatment  even  in  the  face  of  certain 
death.  ^^  It  thus  may  be  socially  desirable  and  practically  feasible  to 
leave  decisions  about  whether  or  to  what  extent  to  cover  liver  trans- 
plantation to  private  choices  of  employers,  health  insurers,  and  organized 
health  plans,  all  of  which  are  accountable  to  consumers  in  a  competitive 
market.'^'  Even  where  public  financing  is  necessary,  government  may 
recede  from  its  current  role  as  dominant  decisionmaker  by  cashing  out 
current  in-kind  benefits  and  letting  beneficiaries  shop  for  private  coverage 
with  financial  help  in  the  form  of  a  government-supplied  voucher. '^^  In 
this  fashion,  government  can  fulfill  its  responsibility  for  providing  a 
decent  minimum  level  of  health  services  without  having  to  rule  definitively 
on  what  services  beneficiaries  must  select. 

Whether  the  performance  of  a  competitive,  demand-sensitive  market 
for  health  care  will  satisfy  the  full  range  of  public  expectations  is  still 
an  open  question,  but  there  is  at  least  some  evidence  that  health  care 
consumers  and  providers  are  now  economizing  in  ways  previously  resisted. 
Thus,  it  may  be  possible 

to  eschew  trying  to  solve  the  [catastrophic  disease]  problem  in 
any  definitive  fashion  and  instead  to  take  steps  to  enhance  each 

'2°Available  data  suggest  not  only  that  liver  transplantation  is  uniquely  expensive  but 
that  it  can  plausibly  be  viewed  as  of  questionable  benefit.  Although  the  OTTF  Report's 
survey  of  liver  transplantation  morbidity  and  mortality  is  brief,  OTTF  Report,  supra  note 
67,  at  29-32,  other  sources  raise  some  important  questions  concerning  the  toxicity  of 
cyclosporin,  the  effect  of  long-term  administration  of  immunosuppressive  drugs  on  the 
growth  and  development  of  children,  and  the  near-total  lack  of  measures  of  the  quality 
of  survivors'  lives.  See  Nat'l  Center  for  Health  Services  Research,  DHHS,  Liver 
Transplantation  (1983);  Starzl,  1  Transplantation  Proceedings  (1985).  The  OTTF 
addressed  these  major  concerns  only  in  connection  with  the  prospect  that  too  many 
transplant  seekers  might  die  in  the  state-mandated  queue;  if  this  happens,  the  OTTF 
Report  advocates  that  individuals  meeting  the  medical  criteria  for  inclusion  "be  persuaded 
not  to  attempt  to  join  the  queue"  by  telling  them  the  truth  about  transplantation.  OTTF 
Report,  supra  note  67,  at  83.  The  implication  is  that  if  people  understood  all  of  the 
risks,  consequences,  and  side  effects  of  transplantation  and  their  implications  for  the 
duration  and  quality  of  life  of  survivors,  a  significant  number  of  candidates  would 
voluntarily  forgo  the  procedure.  One  would  suppose  that  potential  candidates  deserve  the 
opportunity  to  achieve  that  full  understanding  regardless  of  the  size  of  the  organ  supply. 
The  OTTF  was  even  farther,  of  course,  from  seeing  any  connection  between  doubts  about 
the  value  of  the  procedure  and  the  procedure's  extraordinary  costs;  it  was  also  opposed 
to  letting  individuals  compare  likely  benefits  and  costs  before  deciding  whether  to  invest 
in  the  necessary  insurance.  Id.  The  Minnesota  Coalition  Report  specifically  contemplates 
such  choices.  Minnesota  Coalition  Report,  supra  note  8,  at  47-48. 

'^'Allowing  individual  consumers  to  exercise  free  choice  creates  problems  of  adverse 
selection  and  may  be  questionable  policy  for  other  reasons.  See  infra  note  124. 

^^^See  Minnesota  Coalition  Report,  supra  note  8,  at  38-41.  This  report  discusses 
two  alternative  strategies  for  "implementing  the  'basic  level  of  health  care'  principle." 
Id.  One  of  these  is  a  voucher-type  strategy  that  would  leave  the  private  sector  substantial 
decisionmaking  freedom. 


986  INDIANA  LAW  REVIEW  [Vol.  19:955 

individual's  ability  to  solve  his  own  personal  problem  by  choosing 
among  a  variety  of  available  options,  with  public  financial  as- 
sistance where  necessary.  Such  a  strategy  lacks  the  tidiness  and 
specificity  which  policymakers  often  desire  and  would  doubtless 
leave  many  residual  problems.  .  .  .  But  the  fundamental  values  of 
pluralism  and  freedom  .  .  .  suggest  an  obHgation  not  only 
to  tolerate  but  also  to  foster  diversity  on  matters  as  intensely 
personal  and  private  as  the  means  of  coping  with  life-threatening 
disease  and  the  attendant  tragic  choices. '^^ 

Such  an  approach  provides  a  major  challenge  to  society's  ability  to 
educate  consumers  and  foster  rational  decisionmaking  about  low-prob- 
ability events.  ^^"^ 

The  Massachusetts  experience  with  liver  transplantation  yielded  one 
interesting  datum  helpful  in  appraising  the  market  alternative  when 
MBCBS  offered  TIP  at  an  actuarially  fair  price  to  their  group  accounts 
and  fewer  than  one  third  of  them  accepted  the  offer.  Unanswered,  of 
course,  are  many  questions,  including  the  ultimate  one — whether  a 
situation  in  which  some  citizens  are  protected  against  a  highly  visible 
health  care  need  and  others  are  not  is  a  stable  and  tenable  one  or  one 
that  would  disintegrate  upon  the  appearance  of  a  transplant  candidate  who 


^^^See  Havighurst,  Blumstein,  &  Bovbjerg,  supra  note  5,  at  189. 
'^The  simple  view  is  that  "organ  transplantation  is  the  epitome  of  an  insurable  event; 
transplants  are  random,  rare,  their  risk  probabilities  are  measurable,  and  transplants  are 
prohibitively  expensive  for  most  individuals."  Minnesota  Coalition  Report,  supra  note 
8,  at  vi.  But  letting  individuals  choose  is  not  necessarily  the  optimal  policy.  For  example, 
Calabresi  observes: 

I'd  Uke  to  know,  for  instance,  if  any  individual  does  value  his  own  hfe  in  a 

way  that  can  meaningfully  be  used  in  choosing  between  life  and  death  risks.  If 

each   of  us  were   paid  to  take  a  one  in   a  million  chance  to  lose  our  life, 

reaUstically,  how  much  would  we  ask?  How  much  more  would  we  ask  if  the 

chance  of  death  were  one  in  one  thousand?  Or  one  in  two?  I  would  suggest 

that  the  value  that  most  of  us  would  give  to  our  lives  would  not  be  the  same 

value  in  the  three  cases,  after  discounting  by  mathematical  risk.  In  other  words, 

the  value  we  as  individuals  put  on  our  life  is  not  independent  of  the  gamble 

we  are  taking.  This  fact  makes  it  very,  very  difficult  as  a  practical  matter  to 

define  any  value  as  the  appropriate  one  in  creating  incentives  for  safety. 

Calabresi,   Commentary,  in  Ethics  in  Health  Care  48,  52  (1974).   For  findings  from 

psychological  research  suggesting  inconsistencies  and  incoherence  in  consumer  decisions 

that  require  the  weighing  of  risks  and  valuation  of  alternative  outcomes,  see  Kahneman 

&  Tversky,  The  Psychology  of  Preferences,  246  Sci.  Am.  12  (1982);  Tversky  &  Kahneman, 

The  Framing  of  Decisions  and  the  Psychology  of  Choice,  211  Sci.  453  (1981).  Although 

these  difficulties  suggest  the  shortcomings  of  individual  choice,  most  market  choices  of 

insurance  coverage  are  not  made  by  uninstructed  consumers.  Instead,  they  are  most  likely 

to  emerge  from  collective  processes  in  employment  groups  and  to  reflect  the  sophistication 

of  employers,  insurers,  and  medical  care  providers.  Such  collective  choices  are  likely  alone 

to  reflect  both  shared  values  and  the  existence  of  alternative  uses  of  the  resources  at 

stake. 


1986]  LIVER  TRANSPLANTATION  987 

turned  down  the  available  protection.  This  empirical  question  deserves 
more  thoughtful  attention  than  it  has  yet  received.  For  example,  it  would 
not  be  conclusive  evidence  against  relying  upon  market  choices  to  ration 
transplantation  if  an  occasional  patient  should  receive,  at  an  employer's 
or  insurer's  expense,  a  treatment  that  was  not  included  in  purchased 
coverage.  Informal  provision  of  such  charity  for  occasional  exceptionally 
appealing  cases  is  not  an  unthinkable  alternative  to  the  Massachusetts 
rationing  system.  Indeed,  it  could  supply  just  the  buffer  against  highly 
publicized  denials  of  care  that  is  needed  to  maintain  an  effective  barrier 
to  spending  vast  resources  on  marginally  beneficial  treatments. 

Attention  must  also  be  given  to  the  design  of  coverage  that  can 
survive  the  inevitable  questioning  and  legal  challenges.  One  can  imagine, 
for  example,  insurance  policies  that  provide  liver  transplants  for  the 
most  appealing  patients,  such  as  children,  but  deny  them  to  victims  of 
less  attractive  diseases,  such  as  alcohoHsm.  Other  mechanisms  for  con- 
trolling costs  and  ensuring  quality  include  limiting  coverage  to  transplants 
obtained  in  centers  that  have  been  identified  by  the  insurer  as  efficient 
and  low-cost.  Although  much  remains  to  be  learned  about  whether  and 
how  to  purchase  this  costly  and  still  questionable  service,  privatization 
of  catastrophic  insurance,  perhaps  with  tax  and  other  incentives  to 
encourage  coverage  broad  enough  to  minimize  the  demoralizing  effects 
of  tragic  choices,  would  seem  to  make  possible  sensible  rationing  tech- 
niques that  the  public  sector  could  not  itself  sustain. ^^^ 

Perhaps  the  best  way  to  conclude  this  reflection  on  how  society 
handles  these  difficult  matters  is  to  ask  how  these  problems  will  be 
addressed  a  hundred  years  from  now.  Is  there  any  doubt  that  society 
will  somehow  reassess  its  commitment  to  saving  lives  without  regard  to 
cost  and  will  come  to  accept  as  a  matter  of  course  some  deaths  that 
could  be  prevented  by  the  application  of  high  technology?  There  are 
many  different  ways  in  which  patients  can  be  selected  for  treatment, 
not  all  of  which  require  reliance  on  government  to  act  directly  or  indirectly 
as  the  giver  or  denier  of  life  itself.  Without  question,  our  attitudes 
toward  such  matters  are  changing.  Ultimately  we  must  give  up  some 
cherished  but  so  far  unexamined  collective  beliefs.  The  frightening  but 
certain  truth  is  that  we  are  acting  out  our  own  morality  play — one  in 
which  some  simpUstic  values,  of  the  kind  that  flourish  most  in  a  political 
environment,  must  eventually  give  way  to  some  hard  realities  of  the  human 
condition.  As  in  any  great  drama,  the  central  question  is  whether  other, 
more  vital  values  will  be  preserved. 


'"Current  proposals  to  provide  catastrophic  health  insurance  protection,  see,  e.g.. 
Perspectives,  Catastrophic  Insurance,  Washington  Rep.  on  Med.  «&  Health,  Apr.  21,  1986, 
would  benefit  from  being  examined  in  light  of  the  concerns  expressed  herein  about  placing 
government  in  a  central  decisionmaking  role. 


The  Lithotripsy  Game  in  North  Carolina: 
A  New  Technology  Under  Regulation  and  Deregulation* 

Clark  C.  Havighurst** 
Robert  S.  McDonough*** 


I.     The  Stakes  in  the  Game — Rewards  of  a  New  Technology 

Every  few  years,  it  seems,  an  expensive  new  medical  technology  tests 
the  ability  of  the  health  care  system  to  assess  its  efficacy,  safety,  and 
cost-effectiveness  and  to  allocate  resources  so  that  patients  receive  optimal 
treatment  at  reasonable  cost.  Resembling  in  this  respect  earlier  diagnostic 
imaging  technologies,  extracorporeal  shock  wave  lithotripsy  (ESWL)  is 
a  recent  technological  breakthrough  that  has  captured  the  attention  of 
health  planners  and  policymakers. •  This  noninvasive  procedure,  which 
employs  equipment  costing  up  to  $2.7  million  per  installed  unit,  is 
revolutionizing  the  treatment  of  urinary  stones.^ 

ESWL  appears  to  be  a  highly  desirable  technology  from  every  stand- 
point. Not  only  does  it  achieve  excellent  results  with  lower  complication 


*Support  for  the  research  reflected  in  this  Article  was  provided  under  Grant  No. 
HS05326  from  the  National  Center  for  Health  Services  Research  and  Health  Care  Tech- 
nology Assessment,  U.S.  Department  of  Health  and  Human  Services.  The  authors  are 
indebted  to  the  numerous  individuals,  most  of  whom  are  cited  herein,  who  greatly  assisted 
the  authors  in  forming  their  impressions  of  lithotripsy  in  North  Carolina.  The  interpretations 
offered  here  are  of  course  not  necessarily  shared  by  those  who  assisted  the  authors  or 
participated  so  conscientiously  in  the  policymaking  effort. 

**WilUam  Neal  Reynolds  Professor  of  Law,  Duke  University.  A.B.,  Princeton  Univer- 
sity,  1955;  J.D.,  Northwestern  University,   1958. 

***B.A.,  1982,  B.S.,  1982,  University  of  Texas  at  Austin;  J.D.  Candidate,  Duke 
University  School  of  Law,  1987;  M.A.P.P.S.  Candidate,  Duke  Institute  of  Policy  Sciences 
and  Public  Affairs,  1988;  M.D.  Candidate,  Duke  University  School  of  Medicine,  1988. 

'For  formal  technology  assessments  of  ESWL,  see  National  Center  for  Health 
Services  Research  &  Health  Care  Technology  Assessment,  U.S.  Dep't  of  Health  & 
Human  Services,  Extracorporeal  Shock  Wave  Lithotripsy  (ESWL)  Procedures  for 
the  Treatment  of  Kidney  Stones  (1985);  Office  of  Technology  Assessment,  United 
States  Congress,  Effects  of  Federal  Policies  on  Extracorporeal  Shock  Wave  Lith- 
otripsy (1986);  Farrell,  Percutaneous  Ultrasound  Procedures  for  the  Treatment  of  Kidney 
Stones,  1986  Int'l  J.  Tech.  Assessment  Health  Care  152;  Health  and  Public  Policy 
Committee,  American  College  of  Physicians,  Lithotripsy,  103  Annals  Internal  Med.  626 
(1985).  For  other  recent  descriptions  and  evaluations,  see  Mueller,  Extracorporeal  Shock 
Wave  Lithotripsy  of  Ureteral  Stones:  Clinical  Experience  and  Experimental  Findings,  135 
J.  Urology  831  (1986);  Riehle,  Extracorporeal  Shock  Wave  Lithotripsy  for  Upper  Urinary 
Tract  Calculi:  One  Year's  Experience  at  a  Single  Center,  255  J.  A.M.A.  2043  (1986); 
Webb,  Extracorporeal  Shock  Wave  Lithotripsy  and  Percutaneous  Renal  Surgery,  58  Brit. 
J.  Urology  1  (1986). 

^In  ESWL,  electrohydraulic  shock  waves  shatter  kidney  stones  into  small  fragments 
so  that  they  can  be  passed  naturally  by  the  patient.  Chaussy  &  Schmiedt,  Shock  Wave 

989 


990  INDIANA  LAW  REVIEW  [Vol.  19:989 

rates  than  invasive  therapies,^  but  even  given  the  high  cost  of  "Hthotrip- 
ters,"  it  may  cost  less  per  treatment  than  the  surgical  procedures  it 
replaces/  Margaret  Heckler,  Secretary  of  Health  and  Human  Services, 
called  attention  to  both  the  medical  benefits  and  the  cost  savings  of  ESWL 
when  she  announced  the  approval  of  the  first  lithotripter  by  the  Food 
and  Drug  Administration  (FDA)  in  1984.^ 

Although  there  is  virtually  no  question  that  ESWL  is  highly  effi- 
cacious and  extremely  safe,  it  has  created  significant  problems  for  the 
health  care  system.  In  particular,  early  and  widespread  recognition  of  the 
potential  benefits  of  ESWL  put  intense  and  sudden  pressure  on  those  pro- 
cesses that  society  has  installed  to  evaluate  medical  technology  and  to  guide 
the  health  care  system's  development.  State  certificate-of-need  (CON)^ 
regulators  were  put  in  the  position  of  being  able  to  award  very  big 
prizes  to  a  very  few.  Entrepreneurial  urologists  and  hospitals,  playing 
for  large  stakes,  pushed  the  regulatory  system  very  hard.  In  cases  where 
the  regulators  stood  firm,  they  were  in  the  potentially  awkward  position 


Treatment  for  Stones  in  the  Upper  Urinary  Tract,  10  Urologic  Clinics  N.  Am.  743 
(1983).  Prior  to  the  procedure,  the  patient  is  anesthetized  to  keep  him  pain-free  and 
immobilized  while  shocks  are  administered.  Finlayson  &  Thomas,  Extracorporeal  Shock- 
Wave  Lithotripsy,  101  Annals  Internal  Med.  387,  388  (1984).  The  patient  is  then  placed 
into  a  tub  of  water  over  a  shock- wave  generator.  A  two-axis  x-ray  system  is  used  to 
locate  the  stone  and  the  shock-wave  generator  is  adjusted  so  that  the  shock-waves  are 
focused  on  the  stone.  Approximately  1300  shocks  are  administered  during  the  average 
one-hour  procedure. 

A  lithotripter  currently  costs  approximately  $1.7  miUion,  not  including  the  costs  of 
installation,  which  can  add  an  additional  $1  million  to  the  price.  American  Hosp.  Ass'n, 
Lithotripters:  Noninvasive  Devices  for  the  Treatment  of  Kidney  Stones,  6  Hosp.  Tech- 
nology Series:  Guideline  Report  15,  19  (1985).  But  see  infra  note  15  (stating  that  several 
U.S.  companies  are  exploring  the  manufacture  of  lower  cost  lithotripters). 

^Surgical  lithotomy  has  an  associated  mortahty  rate  of  0.8  percent,  R.  Smith  &  D. 
Skinner,  Complications  of  Urologic  Surgery  and  Management  102  (1976),  whereas 
ESWL  has  a  complication  rate  of  less  than  one  percent  with  virtually  no  associated 
mortahty,  Finlayson  &  Thomas,  supra  note  2,  at  388. 

"•The  primary  cost  saving  of  ESWL  comes  from  a  reduction  in  the  length  of  hospital 
stay.  FDA  Approves  Lithotripter  for  Kidney  Stone  Shattering,  253  J.  A.M. A.  620  (1985) 
[hereinafter  FDA  Approves  Lithotripter].  An  uncomplicated  surgical  lithotomy  requires  an 
average  stay  of  one  to  three  weeks.  Castaneda-Zuniga,  Nephrostolithotomy:  Percutaneous 
Techniques  for  Urinary  Calculus  Removal,  134  Am.  J.  Radiology  721,  724  (1982).  The 
newer  technique  of  percutaneous  nephrolithotomy  requires  four  to  eight  days  of  hospi- 
talization. Id.  ESWL  patients  currently  remain  in  the  hospital  only  three  days  on  average, 
and  it  is  anticipated  that  ESWL  will  eventually  be  performed  on  an  outpatient  basis.  FDA 
Approves  Lithotripter,  supra,  at  620-21. 

^U.S.  Dep't  of  Health  &  Human  Services,  HHS  News  2  (Dec.  19,  1984)  (statement 
by  Margaret  M.  Heckler,  Secretary  of  Health  &  Human  Services). 

^Certification  of  need  is  a  legislatively  mandated  process  whereby  health  care  providers 
and  institutions  must  obtain  approval  from  a  state  agency  before  making  large  capital 
expenditures  or  instituting  costly  new  services.  See  infra  notes  12-15  and  accompanying 
text. 


1986]  LITHOTRIPSY  991 

of  giving  the  winners  valuable  monopolistic  franchises  and  depriving  the 
losers  of  patients  and  significant  income.^  Where  the  regulatory  system 
gave  way,  the  possibility  of  overinvestment  in  duplicative  facilities  raised 
the  specter  of  excessive  costs,  overuse  of  ESWL,  and  neglect  of  alternative 
therapies  when  they  might  be  medically  indicated.^  Although  ESWL  is 
a  striking  development  in  itself,  much  of  its  interest  for  policymakers 
lies  in  the  lessons  it  teaches  about  the  overall  health  care  system  and 
its  ability  to  allocate  resources  and  accommodate  technological  change. 
ESWL  has  had  a  particularly  significant  impact  on  urologic  practice 
in  North  Carolina.  That  state  lies  in  the  center  of  the  so-called  '*stone 
belt,"  an  area  of  the  country  where  urinary  stones  are  particularly 
common.^  North  Carolina  urologists  are  thus  heavily  committed  to  the 
treatment  of  urinary  stones,  devoting  an  estimated  fifteen  to  twenty 
percent  of  their  professional  work  to  this  condition.  ^^  Hospitals,  too, 
obtain  significant  income  from  urinary  stone  patients,  and  this  business 
has  been  widely  shared  by  all  hospitals.  ESWL  thus  posed  an  economic 
threat  to  both  urologists  and  hospitals  in  North  Carolina.  If  treatment 
of  stones  in  the  kidney  and  upper  urinary  tract  were  suddenly  concentrated 
in  a  small  number  of  lithotripsy  centers,  the  impact  on  the  providers 
losing  that  business  would  be  substantial.  The  appearance  of  this  new 
technology  in  North  Carolina  also  threatened  to  accentuate  a  flow  of 
patients  away  from  community  hospitals  into  the  state's  few,  but  stra- 
tegically located,  academic  medical  centers.  A  major  "town/gown"  con- 
flict thus  quickly  developed  as  community  urologists  sought  to  keep  their 
patients  out  of  the  academic  institutions,  which  allegedly  did  not  always 
return  patients  to  the  care  of  their  original  doctors. 


^See,  e.g.,  Michigan  News  Briefs,  United  Press  International,  Feb.  11,  1986  (reporting 
that  Michigan  Department  of  Public  Health  had  ordered  Michigan's  two  largest  hospitals 
not  to  bill  patients  for  ESWL  until  they  received  CON  approval);  New  Kidney  Stone 
Crushing  Technique  Studied,  United  Press  International,  April  26,  1985  (stating  that  Virginia 
Health  Commissioner  announced  his  intent  to  "guard  against  unnecessary  proliferation" 
of  lithotripers  despite  the  increasing  number  of  applications  for  certificates  of  need  for 
lithotripters). 

^See,  e.g.,  Freifeld,  The  Rush  to  Crush,  Forbes,  March  11,  1985,  at  170,  171 
(stating  that  in  Chicago,  health  planners  had  succumbed  to  provider  pressures  in  approving 
more  lithotripters  than  were  necessary). 

^See  Brown,  Living  in  the  Stone  Belt  Can  Be  Dangerous  to  Your  Kidneys,  Durham 
Morning  Herald,  Jan.  13,  1987,  at  A9,  col.  1.  Apparently  because  of  dietary  factors, 
residents  of  southeastern  states  have  a  higher  incidence  of  calculi  of  the  kidney  and  ureter 
than  other  U.S.  citizens.  Id.  In  1984,  the  incidence  of  kidney  stones  in  North  Carolina 
was  29.9  per  10,000  population  contrasted  with  the  mean  incidence  among  states  of  16.4 
cases  per  10,000  population.  Sierakowski,  The  Frequency  of  Urolithiasis  in  Hospital 
Discharge  Diagnoses  in  the  United  States,  15  Investigative  Urology  438,  440  (1978). 

'"Personal  communication  with  John  L.  Weinerth,  M.D.,  Associate  Professor,  Division 
of  Urology,  Duke  University  (July  1986). 


992  INDIANA  LA  W  REVIEW  [Vol.  19:989 

Although  the  struggle  to  capture  the  North  Carolina  ESWL  market 
is  interesting  in  itself  as  a  spectator  sport,  there  are  more  important 
reasons  to  focus  on  the  North  Carolina  experience.  First,  the  operation 
of  the  CON  system  was  tested  in  significant  ways,  yielding  lessons  for 
students  of  this  form  of  regulation.  Second,  the  method  of  paying 
urologists  for  lithotripsy  received  an  unusual  degree  of  attention,  high- 
lighted by  a  clash  between  practicing  urologists  and  Blue  Cross  and  Blue 
Shield  of  North  Carolina  (NCBCBS)  over  the  proper  professional  fee. 
This  controversy  yields  some  lessons  about  how  business  is  done  in  a 
state  that  has  yet  to  see  many  of  the  vaunted  benefits  of  competition 
in  health  care^'  and  suggests  some  serious  questions  about  the  role  of 
Blue  Cross  and  Blue  Shield  plans  in  forestalling  such  competition  not 
only  in  North  Carolina  but  in  the  nation  as  a  whole.  Finally,  the  North 
Carolina  story  has  recently  culminated,  for  reasons  that  will  appear,  in 
the  repeal  of  CON  requirements  for  lithotripters,  thus  presenting  every- 
one— but  especially  NCBCBS — with  a  future  challenge.  This  Article  thus 
includes  a  discussion  of  what  must  happen  now  in  the  deregulated  North 
Carolina  market  (and  wherever  else  deregulation  is  tried)  if  the  right 
number  of  lithotripters  are  to  be  appropriately  located  and  properly 
used.  Although  it  is  far  from  clear  that  North  Carolina  is  ready  for 
deregulation  of  a  single  technology  of  this  kind,  the  lessons  drawn  from 
the  North  Carolina  experience  may  suggest  to  other  states  the  merits  of 
general  deregulation  and  the  urgency  of  encouraging  the  competitive 
developments  that  would  permit  it. 

II.     The  con  Game—Winner  Take  All 

State  CON  laws  were  intended  to  contain  costs  and  make  the  de- 
velopment of  the  health  care  system  more  rational  by  requiring  prior 
state  approval  before  major  capital  expenditures  could  be  made  and  new 
health  services  could  be  introduced.'^  Because  prevention  of  duplication 

^^See  infra  notes  45-63  and  accompanying  text. 

^^See,  e.g.,  P.  Joskow,  Controlling  Hospital  Costs:  The  Role  of  Government 
Regulation  (1981);  D.  Salkever  &  T.  Bice,  Hospital  Certificate-of-Need  Controls: 
Impacts  on  Investment,  Costs,  and  Use  11-24  (1979);  Bovbjerg,  Problems  and  Prospects 
for  Health  Planning:  The  Importance  of  Incentives,  Standards  and  Procedures  in  Certificate 
of  Need,  1978  Utah  L.  Rev.  83,  84-90;  Havighurst,  Regulating  Health  Facilities  and 
Services  by  "Certificate  of  Need;'  59  Va.  L.  Rev.  1143,  1155-69  (1973).  Like  other  states. 
North  Carolina  has  enacted  a  CON  law,  N.C.  Gen.  Stat.  §  131E-175  to  191  (Supp. 
1985),  pursuant  to  the  National  Health  Planning  Resource  and  Development  Act  of  1974, 
Pub.  L.  No.  93-641,  88  Stat.  2225,  2584-645  (codified  as  amended  at  42  U.S.C.  §  300k- 
n  (1982)).  An  earlier  North  Carolina  CON  law  was  held  invalid  under  the  state  constitution. 
In  re  Certificate  of  Need  for  Aston  Park  Hosp.,  Inc.,  282  N.C.  542,  193  S.E.2d  729 
(1973).  Before  creating  the  present  statute,  the  state  resisted,  unsuccessfully,  the  subsequent 
federal  compulsion  to  enact  a  CON  statute  meeting  federal  specifications.  See  North 
Carohna  ex  rel.  Morrow  v.  Cahfano,  445  F.  Supp.  582  (E.D.N.C.  1977),  aff'd  mem.,  435 
U.S.  962  (1978). 


1986]  LITHOTRIPSY  993 

is  a  key  regulatory  goal,  these  laws  create  a  powerful  incentive  for 
providers  to  put  any  promising  new  technology,  tried  or  untried,  in  place 
as  quickly  as  possible;  once  CON  approval  is  obtained,  there  is  a  strong 
regulatory  barrier  to  entry  by  competitors  until  the  market  expands 
enough  to  support  a  second  facility  without  appreciable  harm  to  the 
first.  Even  if  the  first  mover  purchases  costly  first-generation  equipment, 
it  will  be  protected  against  competition  from  a  later  applicant  offering 
to  provide  the  same  service  for  less.'^  The  convoluted  rationale  for 
protecting  inefficient  providers  from  price  competition  in  this  way  is  not 
addressed  here,^"*  but  it  is  notable  that  one  effect  of  this  form  of  regulation 
is  to  encourage  early  investment  by  relieving  the  proponent  of  the  concern 
that  his  investment  will  be  devalued  when  more  efficient  technology 
becomes  available.  This  point  is  of  present  interest  because  other  lith- 
otripsy devices  that  are  now  under  development  are  expected  to  cost 
substantially  less  than  the  devices  currently  being  installed. ^^ 

North  Carolina  providers  began  jockeying  for  CON's  soon  after  the 
announcement  of  plans  for  introducing  the  lithotripter  into  the  United 
States  from  Europe,  where  it  was  first  developed.  Indeed,  an  application 
to  offer  ESWL  in  North  Carolina  was  filed  one  month  before  Dornier- 


'^C/.  C.  Havighurst,  Deregulating  the  Health  Care  Industry  195-202,  214-22, 
345-53  (1982)  (noting  the  protectionist  tendencies  of  CON  regulation  with  respect  to  such 
desirable  cost-saving  innovations  as  home  health  care,  HMO's,  and  ambulatory  surgical 
facilities). 

'Vf/.  at  277-85  (explaining  and  criticizing  the  thinking  behind  protectionist  regulation). 

'^In  addition  to  Dornier-System,  the  manufacturer  of  the  first  device  approved  in 
the  United  States,  at  least  four  U.S.  companies  are  exploring  the  manufacture  of  litho- 
tripters.  The  first  of  these  to  begin  clinical  testing  was  Medstone  International,  Spartanburg, 
South  Carolina.  As  of  May  1985,  Medstone  had  obtained  FDA  investigational  device 
exemptions  for  five  sites.  American  Urologic  Ass'n,  Report  to  the  Executive  Committee 
of  the  AUA:  Ad  Hoc  Committee  to  Study  the  Safety  and  Clinical  Efficacy  of  the  Current 
Technology  of  Percutaneous  Lithotripsy  and  Noninvasive  Lithotripsy  20  (May  16,  1985) 
[hereinafter  Report  to  the  Executive  Committee].  The  Medstone  lithotripter  uses  a  fluid- 
filled  bag  for  the  acoustic  interface;  with  the  Dornier  device,  the  patient  is  placed  in  a 
tub.  The  estimated  cost  of  the  Medstone  lithotripter  is  about  $800,000,  about  half  the 
cost  of  the  Dornier  device. 

Two  other  firms  have  conducted  in  vivo  studies  in  animals.  International  Biomedics, 
Inc.,  of  Issaqua,  Washington,  uses  a  laser-driven  shock  wave  generator  and  water-filled 
chest  waders  for  the  acoustic  interface.  Id.  Another  lithotripter,  being  developed  by  Dr. 
Fray  Marshall  and  colleagues  at  the  Johns  Hopkins  Medical  Center,  also  uses  a  fluid- 
filled  bag  but  differs  from  others  in  using  ultrasound  rather  than  x-rays  for  imaging.  Id. 
at  21.  The  anticipated  cost  of  the  Hopkins  device  is  between  $250,000  and  $500,000.  The 
SD-3  lithotripter,  being  developed  by  Northgate  Research,  Inc.,  of  Plattsburg,  New  York, 
was  only  in  the  in  vitro  investigational  stage  in  1985.  Id.  at  20.  The  cost  of  this  device, 
if  perfected,  is  estimated  to  be  only  $250,000. 

Because  lower  cost  second-generation  devices  may  become  available,  hospitals  may 
be  hesitant  about  purchasing  costly  first-generation  equipment.  See  The  Race  for  Competing 
Lithotripters  Heats  Up,  Hospitals,  July  20,  1986,  at  30;  Lithotripsy:  Hospitals  Take  a 
Wait  and  See  Attitude,  Hospitals,  May  20,   1986,  at  75. 


994  INDIANA  LAW  REVIEW  [Vol.  19:989 

System  GmbH,  the  German  manufacturer  of  the  original  lithotripter, 
filed  its  initial  application  for  FDA  approval  of  the  device  on  February 
22,  1984.  This  apphcation — by  North  CaroUna  Baptist  Hospital  in  Win- 
ston-Salem, which  is  associated  with  The  Bowman  Gray  School  of 
Medicine  of  Wake  Forest  University — was  approved  in  June  1984,  six 
months  before  the  FDA  approved  the  Dornier  device.'^  A  second  ap- 
plication— by  Carolina  Lithotripsy,  Ltd.,  a  limited  partnership  of  forty- 
two  North  Carolina  urologists — was  also  filed  before  the  FDA  acted. 
This  Fayetteville-based  partnership  was  organized  by  Dr.  William  Jor- 
dan, ^^  who  had  gone  to  Germany  at  an  early  date  to  learn  the  procedure 
and  get  a  jump  on  the  market  when  lithotripters  finally  became  mar- 
ketable in  the  United  States.'^ 

The  forehandedness  of  these  CON  applications  was  impressive 
because  FDA  approval  of  a  new  technology  normally  takes  several  years.  ^' 
However,  in  this  case,  the  FDA,  recognizing  the  potential  benefits 
of  the  lithotripter  and  its  extensive  testing  and  use  in  West  Germany, 
acted  with  extraordinary  rapidity,^"  approving  the  device  on  December  19, 


^^See  Letter  from  William  Vaughn,  Chief,  Certificate  of  Need  Section,  Division  of 
Facility  Services,  N.C.  Dep't  of  Human  Resources,  to  John  Lynch,  President,  North 
Carolina  Baptist  Hospitals  (June  29,  1984),  Dr.  David  McCullough,  Chairman  of  the 
Division  of  Urology  at  Bowman  Gray  School  of  Medicine  of  Wake  Forest  University, 
explained  that  Bowman  Gray  urologists  decided  to  pursue  CON  approval  early  because 
they  were  aware  of  the  results  of  ESWL  testing  in  Europe  and  believed  that  ESWL's 
potential  benefits  made  it  the  "wave  of  the  future."  Personal  communication  with  David 
McCullough,  M.D.  (Jan.   1987). 

^^See  Carolina  Lithotripsy,  Ltd.,  Certificate  of  Need  Application  1-5  (July  12,  1984); 
see  also  Big  Lithotripter  Venture  Helps  Out  Small  NC  Hospital,  Hospitals,  May  20,  1986, 
at  76  (discussing  the  Fayetteville,  N.C,  partnership  of  urologists  that  purchased  a  lithotripter 
to  be  installed  at  Highsmith-Rainey  Memorial  Hospital). 

'^Personal  communication  with  William  Jordan,  M.D.  (July  1985). 

"Currently,  the  FDA  estimates  that  the  median  approval  time  for  devices  since  1976 
has  been  approximately  8-1/2  months.  Kahan,  Premarket  Approval  Versus  Premarket 
Notification:  Different  Routes  to  the  Same  Market,  39  Food  Drug  Cosmetic  L.J.  510, 
518  (1984).  This  median  is  misleading,  however,  as  an  indication  of  the  review  time  for 
truly  new  devices.  Approximately  60<7o  of  the  premarket  applications  (PMAA's)  received 
by  the  FDA  are  not  for  new  devices  but  for  devices  regulated  under  transitional  provisions 
applicable  to  devices  formerly  regulated  as  new  drugs.  Id.  at  518  n.44  (citing  21  U.S.C. 
§  360j(l)(l)  (1982)).  The  review  time  for  these  transitional  devices,  e.g.,  sutures  and  contact 
lenses,  is  generally  very  short.  Id.  In  addition,  many  PMAA's  are  returned  to  the  sponsor 
for  additional  data,  and  this  time  is  not  counted  in  the  FDA's  statistics.  Id.  at  518. 
Economist  Henry  Grabowski,  a  student  of  drug  and  device  regulation,  believes  that  truly 
new  medical  devices  will  be  subject  to  an  average  approval  time  approximately  equal  to 
that  for  new  drugs.  Personal  communication  with  Henry  Grabowski,  Professor  of  Economics, 
Duke  University  (July  1985).  The  FDA  has  taken  an  average  of  35  months  following  the 
filing  of  a  new  drug  application  (analogous  to  a  PMAA)  to  approve  new  drugs.  H. 
Grabowski  &  J.  Vernon,  The  Regulation  of  Pharmaceuticals:  Balancing  the  Benefits 
AND  Risks  23  (1983). 

^°The  FDA  approved  extracorporeal  shock  wave  lithotripsy  for  general  use  less  than 
one  year  after  the  commencement  of  clinical  trials  in  the  United  States.  This  was  unusually 


1986]  LITHOTRIPSY  995 

1984.^'  Carolina  Lithotripsy's  CON  for  a  lithotripter,  scheduled  to  be 
located  in  a  Fayetteville  hospital,  was  issued  one  day  later. ^^ 

Applications  by  other  North  Carolina  providers  followed  quickly 
upon  the  first  CON  awards  and  the  FDA  action.  Stone  Institute  of  the 
Carolinas,  a  Charlotte-based  partnership  of  urologists,  applied  for  a 
CON  in  August  1984,  and  got  its  approval  in  January  1985.^^  North 
Carolina  Memorial  Hospital  in  Chapel  Hill,  an  adjunct  of  the  medical 
school  of  the  University  of  North  Carolina,  received  CON  approval  in 
May  1985.^"*  Unsuccessful  appHcants  included  St.  Joseph's  Hospital  of 


rapid  action.  See  supra  note  19.  One  commentator  argued,  however,  that  the  FDA's 
approval  of  lithotripsy  was  not  fast  enough,  and  that  the  FDA's  delay  in  approving 
lithotripsy  caused  many  kidney  stone  patients,  especially  those  who  were  high-risk  surgical 
candidates,  to  suffer.  Gieringer,  The  FDA's  Bad  Medicine,  33  Pol'y  Rev.  71,  71  (1985). 
One  reason  for  the  FDA's  relatively  speedy  approval  of  ESWL  was  the  extensive 
testing  of  the  procedure  in  Europe  before  it  was  introduced  in  the  United  States.  The 
FDA  had  agreed  to  base  its  approval  largely  on  the  European  data.  The  FDA's  National 
Center  of  Devices  and  Radiological  Health  will  generally  consider  foreign  data  in  support 
of  premarket  approval  if  the  studies  appear  valid  and  if  the  rights,  safety,  and  welfare 
of  the  research  subjects  were  not  violated.  Shapiro,  Legal  Aspects  of  Premarket  Approval 
of  Medical  Devices,  38  Food  Drug  Cosmetic  L.J.  205,  211  (1983).  Although  the  Center 
has  not  relied  solely  on  foreign  data  in  the  past,  the  FDA  has  recently  proposed  to  allow 
approval  of  new  drugs  based  solely  on  foreign  chnical  data.  See  47  Fed.  Reg.  46,643 
(1982).  In  an  interview,  attorney  Joseph  Onek,  who  represented  Domier-System  in  the 
FDA  application  process,  said  that  testing  centers  in  the  United  States  were  able  rapidly 
to  confirm  the  results  of  the  extensive  testing  completed  in  Europe.  Personal  communication 
with  Joseph  Onek  (July  1985).  At  the  time  that  FDA  began  to  evaluate  the  lithotripter, 
it  had  been  used  in  Germany  for  five  years.  Gieringer,  supra  at  71.  U.S.  testing  began 
less  than  one  year  prior  to  FDA  approval.  Nearly  2,000  of  the  10,000  or  so  treatments 
worldwide  had  been  performed  in  the  United  States.  U.S.  Dep't  of  Health  &  Human 
Services,  News  Release,  HHS  News  2  (Dec.   19,  1984). 

Onek  also  explained  that  Dornier  was  slow  in  introducing  the  lithotripter  to  the  U.S. 
market.  By  the  time  it  was  introduced,  urologists,  nephrologists,  and  others  knew  about 
the  lithotripter  and  its  advantages  and  were  anxious  to  obtain  the  device.  Another  factor 
that  may  have  led  to  more  rapid  approval  of  lithotripsy  was  the  lower  per-patient  cost 
of  the  procedure.  Onek  was  of  the  opinion  that  although  relative  cost-effectiveness  is  not 
an  explicit  criterion  for  approval,  FDA  officials  were  aware  of  and  motivated  by  the 
lower  costs  associated  with  lithotripsy. 

2'FooD  &  Drug  Admin.,  U.S.  Dep't  of  Health  &  Human  Services,  Summary  of 
Safety  and  Effectiveness  Data:  Dornier  Lithotripter,  Model  HM3  20  (1985). 

^^See  Letter  from  Susanne  Moulton,  Chief,  Certificate  of  Need  Section,  Division  of 
Facility  Services,  N.C.  Dep't  of  Human  Resources,  to  William  Jordan,  M.D.,  Partner, 
Carohna  Lithotripsy,  Ltd.  (Dec.  20,   1984). 

^^See  Letter  from  Jack  Brinson,  Project  Analyst,  and  Susanne  Moulton,  Chief, 
Certificate  of  Need  Section,  Division  of  FaciUty  Services,  N.C.  Dep't  of  Human  Resources 
to  Orion  Finklea,  President,  The  Stone  Institute  of  the  CaroHnas,  Inc.  (Jan.  28,   1985). 

^Letter  from  Nancy  Bres  Martin,  Project  Analyst,  and  Susanne  Moulton,  Chief, 
Certificate  of  Need  Section,  Division  of  Facility  Services,  N.C.  Dep't  of  Human  Resources 
to  Jane  Rhoe- Jones,  Acting  Director  of  Planning,  North  Carolina  Memorial  Hospital  (May 
30,  1985). 


996  INDIANA  LAW  REVIEW  [Vol.  19:989 

Asheville^^  and  Duke  University  Medical  Center  in  Durham;^^  the  CON 
applications  for  both  facilities  were  denied  because  other  facilities  were 
deemed  sufficient  to  serve  patients  in  their  respective  service  areas. ^"^ 

A  fifth  lithotripter  slipped  into  the  state  through  a  crack  in  the 
regulatory  defenses.  A  CON  application  by  physician-owned  Piedmont 
Urinary  Stone  Center,  Inc.  (Piedmont),  which  proposed  the  installation 
of  a  lithotripter  in  a  Winston-Salem  hospital,  was  reviewed  together  with 
the  apphcation  of  Bowman  Gray's  North  CaroHna  Baptist  Hospital. 
Piedmont's  application  was  denied  because  only  one  service  was  deemed 
necessary  in  the  Winston-Salem/Greensboro  area  and  the  CON  agency 
preferred  that  such  a  service  be  associated  with  an  academic  institution.^^ 
Piedmont  then  proposed,  however,  to  install  a  lithotripter  in  an  outpatient 
facility  unconnected  with  a  hospital  and  successfully  applied  to  the  CON 
agency  for  a  ruling  that  the  CON  statute  did  not  apply  to  capital 
investments  in  major  medical  equipment  to  be  installed  in  physicians' 
off  ices. ^^  Although  the  legislature  quickly  moved  to  close  this  loophole 
by  extending  CON  regulation  to  lithotripters  "regardless  of  ownership 
or  location, "^°  Piedmont's  plans  were  unaffected,  and  its  lithotripter  is 
currently  operating  in  Winston-Salem. 

As  in  the  comparative  hearing  pitting  the  Piedmont  physician  group 
against  Bowman  Gray's  Baptist  Hospital,  the  town/gown  conflict  was 
evident  throughout  the  struggles  over  the  provision  of  ESWL  in  North 
Carolina.  The  next  two  CON's  went  to  physician  groups  that  had  filed 
their  applications  well  before  the  other  academic  institutions.   Subse- 


^^Letter  from  Dudley  Stallings,  Project  Analyst,  and  Susanne  Moulton,  Chief,  Cer- 
tificate of  Need  Section,  Division  of  Facility  Services,  N.C.  Dep't  of  Human  Resources, 
to  Les  Brown,  Director  of  Planning  and  Development,  St.  Joseph's  Hospital  (Aug.  27, 
1985). 

^^Certificate  of  Need  Section,  Division  of  Facility  Services,  N.C.  Dep't  of  Human 
Resources,  Required  State  Agency  Findings,  Disapproval  of  CON  for  Extracorporeal  Shock 
Wave  Lithotripter,  St.  Joseph's  Hospital  2-3  (Aug.  27,  1985). 

"Letter  from  Nancy  Bres  Martin,  Project  Analyst,  and  Robert  Fitzgerald,  Assistant 
Director,  Certificate  of  Need  Section,  Division  of  Facility  Services,  N.C.  Dep't  of  Human 
Resources,  to  WiUiam  Anlyan,  M.D.,  Chancellor  of  Health  Affairs,  Duke  University 
Medical  Center  (May  30,  1986). 

^^See  Letter  from  Everette  Jenkins,  Assistant  Chief,  Certificate  of  Need  Section, 
Division  of  Facility  Services,  N.C.  Dep't  of  Human  Resources,  to  Keith  Christian,  President, 
CV,  Inc.  (July  17,   1984). 

^^See  Declaratory  Ruling,  In  re  Request  for  Declaratory  Ruling  by  Piedmont  Stone 
Center,  P.A.,  Piedmont  Stone  Joint  Venture,  and  Carolina  Medicorp.,  Inc.  (Mar.  28, 
1985);  Letter  from  Jack  Brinson,  Project  Analyst,  Certificate  of  Need  Section,  Division 
of  Facility  Services,  N.C.  Dep't  of  Human  Resources,  to  Charles  Hauser,  Agent,  Piedmont 
Stone  Center  (Apr.  9,   1985). 

^°The  amended  statute  required  that  all  persons  obtain  a  certificate  of  need  prior 
to  the  acquisition  of  a  lithotripter  "regardless  of  ownership  or  location."  N.C.  Gen  Stat. 
§§  131E-176(l6)g,  178(a)  (Supp.  1985).  On  the  policy  implications  of  regulating  capital 
equipment  in  physician  offices,  see  C.  Havighurst,  supra  note  13,  at  205-10. 


1986]  LITHOTRIPSY  997 

quently,  Memorial  Hospital  in  Chapel  Hill  succeeded  despite  its  presence 
in  the  same  service  area  as  the  Fayetteville  group,  in  part  because  it 
asserted  educational  and  research  needs. ^'  (Duke,  ironically,  was  unable 
to  make  this  argument  because  it  already  possessed  a  lithotripter  for 
research  use,  which  was  exempt  from  the  CON  requirement,  and  therefore 
sought  only  authority  to  offer  a  clinical  service  for  compensation).^^ 
Perhaps  in  an  effort  to  defuse  opposition  from  community  urologists, 
Memorial  and  Baptist  hospitals  made  special  arrangements  whereby  the 
former  could  obtain  privileges  to  admit  and  treat  ESWL  patients.  The 
claims  of  community  urologists,  asserted  in  a  number  of  applications 
and  challenges  against  the  academic  centers,  included  concern  for  the 
convenience  of  patients,  the  financial  security  of  community  hospitals, 
and  the  increasing  dominance  of  the  academic  institutions.^^ 

Although  the  CON  regulators  stood  firm  against  exceeding  a  total 
of  five  lithotripters  in  the  state,  certain  powerful  interests  were  unhappy 
with  the  outcome  of  the  CON  process,  which  resulted  in  inconvenience 
for  citizens  in  the  western  part  of  the  state  and  left  one  prestigious 
institution  (Duke)  barred  from  charging  for  the  use  of  a  lithotripter 
already  in  place.  Several  legislators  took  up  the  cause  of  Duke  and  St. 
Joseph's  Hospital  in  Asheville  and  explored  the  possibility  of  legislation 
that  would  bypass  the  CON  agency.  Because  North  Carolina,  unlike 
some  states,  does  not  allow  "special  legislation"  favoring  named  private 
interests, ^^  it  was  necessary  to  write  the  exception  in  generic  terms  that 
bespoke  a  plausible  legislative  objective.  In  about  two  days'  time,  a  bill 
was  written  and  passed  by  the  House  of  Representatives  defining  con- 
ditions for  exemption  that  only  Duke  and  St.  Joseph's  could  meet.^^ 
Shortly  thereafter,  however,  the  Senate  took  a  different  view,  and  both 


^^See  North  Carolina  Memorial  Hospital,  Certificate  of  Need  Application,  Attachment 
3,  5  (Dec.   11,   1985). 

^^See  Certificate  of  Need  Section,  Division  of  Facility  Services,  N.C.  Dep't  of  Human 
Resources,  Required  State  Agency  Findings,  Disapproval  of  Conversion  of  Research 
Lithotripter  to  Clinical  Use,  Duke  University,  6  (May  30,   1986). 

"See,  e.g.,  Letter  from  Raymond  Joyner,  Chairman,  Dep't  of  Urology,  Durham 
County  General  Hosp.,  to  Susanne  G.  Moulton,  Chief,  Certificate  of  Need  Section,  Division 
of  Facility  Services,  N.C.  Dep't  of  Human  Resources  (Jan.  31,   1985). 

'^5ee  N.C.  Const,  art.  II,  §  24;  cf.  Commissioner  of  Public  Health  v.  Bessick  M. 
Burke  Memorial  Hosp.,  366  Mass.  734,  323  N.E.2d  309  (1975)  (upholding  constitutionality 
of  exemptive  legislation  applied  to  CON);  D.  Altman,  R.  Greene  &  H.  Sapolsky,  Health 
Planning  and  Regulation  28,  53,  186-87,  200-01  (1981)  (discussing  special  legislation 
exempting  named  private  interests  from  CON  in  Massachusetts). 

^^Oliver  &  Andrews,  House  OKs  Bill  to  Let  Duke  Use  Kidney-Stone  Machine,  Durham 
Morning  Herald,  July  2,  1986,  at  IB,  col.  2.  Many  other  states  have  discovered  that 
technocratic  regulation  of  the  health  care  industry  frequently  gives  way  whenever  it  becomes 
necessary  to  offend  powerful  interests  that  can  effectively  appeal  to  political  leaders  for 
assistance.  See  D.  Altman,  R.  Greene,  &  H.  Sapolsky,  supra  note  34,  at  26-31,  153, 
177-87,  202-10,  233-36  (noting  ways  providers  circumvent  the  certificate  of  need  process). 


998  INDIANA  LAW  REVIEW  [Vol.  19:989 

houses,  in  a  surprising  move,  finally  decided  to  repeal  altogether  the 
CON  requirement  for  lithotripters  and  ESWL  services. ^^ 

This  sudden  deregulatory  move  by  North  Carolina  has  somewhat 
startling  implications.  Many  states,  no  longer  bound  by  federally  imposed 
requirements  to  maintain  CON  laws,  have  cut  back  on  such  regulation. ^^ 
Although  a  few  states  have  repealed  their  CON  laws  altogether, ^^  most 
have  maintained  controls  over  large  capital  investments  in  hospital-based 
facilities,  ostensibly  on  the  theory  that  capital-intensive  institutional  serv- 
ices are  least  amenable  to  allocation  by  market  forces. ^^  North  Carolina's 
deregulation  of  ESWL,  which  obviously  was  not  the  product  of  a  well- 
considered  policy  judgment,  is  peculiar  in  that  it  preserves  the  basic 
scheme  of  comprehensive  regulation  but  makes  an  exception  for  a  tech- 
nological development  of  the  kind  that  most  observers  would  agree  is 
a  prime  candidate  for  regulatory  allocation. 

The  North  Carolina  experience  reveals  once  again  the  political  di- 
mensions and  debatable  premises  of  CON  regulation.  Despite  numerous 
objective  studies  of  the  question,  CON  regulation  has  never  been  shown 
to  control  health  care  costs. "^  Indeed,  substantial  evidence  suggests  that 
CON  laws  were  put  in  place  not  primarily  to  control  costs  but  to  protect 
the  most  powerful  existing  institutions  against  competitors  skimming 
profitable  business^^  and  to  legitimize  rapidly  rising  costs  in  the  eyes  of 


^^See  Lineberry,  Duke  Lithotripter  Use  Gets  Senate  Approval,  Durham  Morning 
Herald,  July  12,  1986,  at  IC,  col.  5.  Because  North  Carolina  had  not  contracted  with 
the  federal  government  under  section  1122  of  the  Social  Security  Act,  42  U.S.C.  §  1320a- 
1  (1982),  to  perform  planning  services,  leading  to  possible  denial  of  Medicare  reimbursement 
of  capital  costs,  this  legislative  action  removed  all  governmental  constraints  on  the  in- 
stallation of  lithotripters. 

"Simpson,  Full  Circle:  The  Return  of  Certificate  of  Need  Regulation  of  Health 
Facilities  to  State  Control,   19  Ind.  L.  Rev.   1025  (1987). 

''Id.  at  1061,  1079-81. 

^'^See  C.  Havighurst,  supra  note  13,  at  4-5.  In  the  National  Health  Planning  and 
Resources  Development  Amendments  of  1979,  Congress  identified  the  provision  of  "inpatient 
health  services  and  other  institutional  health  services"  as  being  particularly  subject  to  the 
market  failure  that  it  viewed  as  necessitating  CON  regulation  for  new  health  facilities  and 
services.  Legislative  findings  accompanying  the  1979  amendments  stated  that  "the  prevail- 
ing methods  of  paying  for  health  services  by  public  and  private  health  insurers"  make  com- 
petition an  unreliable  allocative  mechanism  and  singled  out  institutional  services  as  most 
likely  to  be  among  those  "for  which  competition  does  not  or  will  not  appropriately  allocate 
supply."  42  U.S.C.  §  300k-2(b)(i)-(2)  (1982);  see  also  H.R.  Rep.  No.  190,  96th  Cong.,  1st 
Sess.  51-54  (1979). 

*°See  generally  C.  Havighurst,  supra  note  13,  at  63-74  (summarizing  analytical  and 
descriptive  studies  of  CON's  effect  on  costs);  P.  Joskow^,  supra  note  12,  at  138-68;  Sloan, 
The  Track  Record  of  Certificate-of-Need  Programs  (paper  presented  at  the  third  annual 
Health  Policy  Symposium,  "The  Role  of  Health  Planning  in  a  Competitive  Environment," 
Vanderbilt  University,  May  15-16,   1986). 

"'"In  North  CaroUna,  improvement  of  the  borrowing  capacity  of  the  hospitals — by 
protecting  them  from  competition — was  an  explicit  purpose"  behind  the  enactment  of  the 
state's  first  CON  law.  Havighurst,  supra  note  12,  at  1164  n.77  (citing  Durham  Morning 


1986]  LITHOTRIPSY  999 

an  increasingly  concerned  public/^  Moreover,  some  have  argued  that  the 
main  effect  of  entry  regulation  has  been  to  protect  payers  and  providers 
from  having  to  alter  their  traditionally  nonadversarial  relationships  by 
embarking,  respectively,  on  prudent  buying  and  competitive  selling  of 
health  services/^  North  Carolina's  deregulation  of  lithotripsy  suggests 
that  legislative  support  for  CON  regulation  is  weakening  and  that  the 
public  is  running  out  of  patience  with  a  regulatory  scheme  that  protects 
estabhshed  institutions. 

The  natural  question  that  arises  is  what  happens  next  in  North 
Carohna.  Unless  the  market  conditions  that  were  deemed  to  warrant 
CON  regulation  have  changed  or  can  now  change  readily,  there  may 
be  a  proliferation  of  unneeded,  overutilized  lithotripters.  According  to 
the  scenario  visualized  by  advocates  of  health  planning  and  CON  reg- 
ulation, the  public  can  expect  to  pay  a  high  price  and  receive  inappro- 
priate, even  unnecessary,  medical  care.  Whether  this  vision  will  be  fulfilled, 
however,  depends  upon  those  who  pay  for  medical  care  and  their  will- 
ingness and  ability  to  defend  themselves  against  the  predictable  higher 
costs.  Later  discussion,  following  examination  of  payment  issues  that 
have  already  arisen  in  North  Carolina,  will  consider  what  actions  payers 
might  take  in  this  regard  and  the  actual  prospects  for  their  taking  them."^ 
That  discussion  will  also  consider  whether  the  scenario  may  instead  fulfill 
the  predictions  of  deregulation  advocates,  who  argue  that  unlimited  entry 
will  trigger  prudent  purchasing  and  effective  price  competition  among 
providers,  creating  a  market  deterrent  to  replace  the  barrier  that  CON 
regulation  supposedly  erected  to  the  creation  of  technological  overca- 
pacity. 

III.     Playing  for  Money 

The  active  pursuit  of  CON's  for  ESWL  facilities  in  North  Carolina 
indicated  that   providers,   particularly  physicians,   anticipated  that   the 


Herald,  June  25,  1971,  at  IC,  col.  1).  See  also  Payton  &  Powsner,  Regulation  through 
the  Looking  Glass:  Hospitals,  Blue  Cross,  and  Certificate-of-Need,  79  Mich  L.  Rev.  203, 
255-56  (1980). 

. ''^Payton  &  Powsner,  supra  note  41,  at  247-48.  This  source  shows  that  the  main 
proponents  of  CON  regulation  were  not  themselves  interested  in  cost  containment  but 
stood  to  gain  if  the  public  could  be  satisfied  that  continued  cost  escalation  was  justified. 
They  may  even  have  anticipated  the  great  political  difficulty  encountered  by  public  regulators 
in  saying  "no"  to  "needs"  asserted  by  reputable  providers.  See  supra  note  35;  C.  Havighurst, 
supra  note  13,  at  25-52. 

''The  crucial  observation  of  Payton  &  Powsner,  supra  note  41,  is  that  CON  laws 
perpetuated  a  financing  system  that  served  the  interests  of  the  dominant  payers  and 
providers.  See  also  Havighurst,  supra  note  12,  at  1156  ("Viewed  in  the  light  of  possibilities 
for  more  fundamental  changes  in  the  market  for  insurance  and  health  services,  certificate- 
of-need  laws  may  appear  as  conservative  measures,  designed  to  preserve  the  very  institutions 
which  create  the  problems  to  which  they  are  addressed."). 

*^See  infra  notes  76-127  and  accompanying  text. 


1000  INDIANA  LA  W  REVIEW  [Vol.  19:989 

ESWL  game  would  be  highly  profitable.  However,  what  profits  would 
be  earned  and  to  whom  they  would  accrue  would  depend  upon  numerous 
factors,  beginning  with  the  policies  and  practices  of  the  various  payers 
and  their  ability  to  bargain  for  favorable  rates  of  payment.  The  North 
Carolina  experience  featured  a  heated  controversy  over  physician  fees 
for  lithotripsy  as  NCBCBS  attempted  to  take  a  stand  against  the  urol- 
ogists' proposal  that  they  receive  an  allowance  for  their  services  roughly 
equal  to  what  they  previously  received  when  kidney  stones  were  managed 
surgically.  As  explored  further  below,  both  the  unusual  effort  made  by 
NCBCBS  and  its  failure  to  affect  fees  significantly  are  instructive. 

The  North  Carolina  experience  with  lithotripsy  also  focused  attention 
on  the  economics  of  patient  referrals  from  community  physicians  to 
ESWL  centers.  Although  questions  were  raised  about  the  ethical  propriety 
of  fees  paid — ostensibly  for  follow-up  services — by  some  centers  to  re- 
ferring physicians,  the  discussion  below  shows  that  such  payments  may 
not  be  incompatible  with  fair  play  and  appropriate  outcomes  in  the 
lithotripsy  game. 

A.     The  UCR  Game — with  the  Blues'  Chips 

When  ESWL  was  first  undertaken  in  North  CaroUna  in  1985,  NCBCBS 
had  to  set  some  limit  on  the  urologists'  professional  allowance  for  the 
procedure. "^^  Hospitals  would  be  reimbursed  their  costs  under  the  cus- 
tomary arrangement,  but  a  limit  on  reimbursable  physician  fees  had  to 
be  initially  established  by  fiat  because  there  was  no  "going  rate"  from 
which  NCBCBS  could  derive  a  "usual,  customary,  and  reasonable" 
(UCR)  rate.  Because  no  fee  was  yet  either  "usual"  or  "customary," 
NCBCBS  turned  to  its  Physician  Advisory  Committee  for  guidance  on 
what  would  be  "reasonable." 

Largely  on  the  strength  of  testimony  by  David  F.  Paulson,  M.D., 
chief  of  the  Division  of  Urology  at  Duke,  NCBCBS's  advisory  committee 
determined  that  a  fee  in  the  range  of  $350  to  $450  would  be  proper. ^^ 


"Personal  communication  with  William  DeMaria,  M.D.,  Medical  Director,  NCBCBS 
(Jan,  1987).  See  also  Medical  Advisory  Panel  of  the  Health  Benefits  Management 
Division,  Blue  Cross  &  Blue  Shield,  Financl^l  Analysis  of  Extracorporeal  Litho- 
TRiPTER  Services,  at  .05  -  .07  (discussing  appropriate  professional  fee  for  ESWL).  Under 
the  typical  NCBCBS  contract,  the  patient  patronizing  a  "participating"  physician  is  assured 
that  the  physician  will  accept  the  plan's  payment  to  him  as  payment  in  full  (subject  to 
any  deductible  or  co-payment  provided  for);  the  plan's  contract  with  the  physician  so 
provides  and  also  sets  a  "UCR"  limit  on  what  the  plan  will  pay.  If  the  patient  patronizes 
a  "non-participating"  doctor,  the  plan  typically  does  not  pay  the  physician  directly  but 
instead  reimburses  the  patient  for  bills  incurred  up  to  a  contractually  specified  limit  (usually 
based  on  the  UCR  formula).  See  generally  Blue  Cross  &  Blue  Shleld  Ass'n,  Usual, 
Customary  and  Reasonable:  An  Explanation  for  Doctors  1-3;  Blue  Cross  and  Blue 
Shield  of  North  Carolina,  Cost  Care:  A  Participating  Doctor  Payment  Plan  (1985). 

"^Personal  communication  with  William  DeMaria,  M.D,,  Medical  Director,  NCBCBS 
(Jan.   1987). 


1986]  LITHOTRIPSY  1001 

This  amount  was  considerably  less  than  the  customary  surgical  fee  of 
$1,500  to  $2,000  for  an  uncomplicated  nephrolithotomy,  which  Carolina 
Lithotripsy  proposed  to  charge/^  The  higher  fee  would  accord  with  the 
general  position  taken  by  the  ad  hoc  committee  on  lithotripsy  of  the 
American  Urological  Association  (AUA)/^  This  committee  was  then 
chaired,  coincidentally,  by  another  North  CaroHnian,  William  H.  Boyce, 
M.D.,  former  chairman  of  the  Division  of  Urology  at  Wake  Forest's 
Bowman  Gray  School  of  Medicine/^  Obviously,  Dr.  Paulson  had  taken 
a  position  very  much  at  odds  with  the  interests  of  his  professional 
colleagues  in  the  state. ^^ 

On  the  merits  of  the  fee  issue,  the  AUA's  view  was  that  the  urologist 
is  required  to  possess  special  knowledge  and  to  exercise  special  skills  in 
ESWL  and  that  the  pre-  and  post-procedure  responsibilities  associated 
with  ESWL  are  the  same  as  with  surgery.^'  In  the  contrary  view  of  Dr. 
Paulson,  the  urologist's  role  in  ESWL  is  merely  to  supervise  the  tech- 
nician, a  much  less  demanding  and  extensive  service  than  a  surgical 
procedure. ^^  Adopting  the  latter  view  and  recognizing  that  some  additional 
charges  for  services  before  and  after  the  procedure  might  also  have  to 
be  paid,  NCBCBS  initially  recognized  $450  as  the  limit  of  its  payment 
responsibility  for  the  procedure  itself.  In  response,  Carolina  Lithotripsy 


""Tersonal  communication  with  William  Jordan,  M.D.  (July  1985).  One  urologist  noted, 
however,  that  the  professional  fee  for  ESWL  is  only  one  element  of  the  total  charge  and 
that  the  relative  size  of  the  professional  fees  among  providers  may  not  correspond  to  the 
relative  total  price  for  the  procedure.  Personal  communication  with  David  McCullough, 
M.D.,  Chairman  of  the  Division  of  Urology  at  Bowman  Gray  School  of  Medicine  of 
Wake  Forest  University. 

"^David  McCullough,  Chairman  of  the  American  Urologic  Association  Ad  Hoc 
Committee  on  ESWL  and  Chairman  of  the  Division  of  Urology  at  Bowman  Gray  School 
of  Medicine,  explained  that  the  larger  fee  was  also  justified  by  the  high  cost  of  training 
urologists  to  perform  lithotripsy.  Personal  communication  with  David  McCullough,  M.D. 
(Jan.  1987).  For  example,  he  estimated  that  the  cost  of  training  five  Bowman  Gray 
urologists  to  perform  lithotripsy,  including  forgone  earnings,  was  $100,000. 

^^ American  Urologic  Association,  Summary  and  Recommendations  of  the  Meet- 
ing OF  THE  Ad  Hoc  Committee  to  Study  the  Safety  and  Clinical  Effectiveness  of 
THE  Current  Technology  of  1)  Percutaneous  Lithotripsy,  and  2)  Non-Invasive  Lith- 
otripsy 5  (May  9,  1984)  [hereinafter  AUA  Summary  and  Recommendations].  The  Ad 
Hoc  Committee  is  currently  chaired  by  North  Carolinian  David  McCullough,  M.D.,  who 
is  also  Chairman  of  the  Division  of  Urology  at  Bowman  Gray. 

'"Paulson  stated  that  colleagues  told  him  of  the  anger  many  urologists,  particularly 
those  in  North  CaroUna,  had  toward  Paulson  for  his  stand  on  this  issue.  Personal 
communication  with  David  Paulson  (Nov,  1986).  Paulson  beleives  that  some  urologists 
may  have  retaliated,  but  beUeves  they  were  too  "shrewd"  to  make  such  retaliatory  actions 
obvious.  Id. 

^'See  AUA  Summary  and  Recommendations  supra  note  49  at  5;  American  Urologic 
Ass'n,  Ad  Hoc  Committee  to  Study  the  Safety  and  Clinical  Efficacy  of  the  Current 
Technology  of  Percutaneous  Lithotripsy  and  Noninvasive  Lithotripsy  14,  16-17  (May 
16,  1985). 

"Personal  communication  with  WiUiam  De  Maria,  M.D.,  Medical  Director,  NCBCBS 
(Jan.  1987). 


1002  INDIANA  LAW  REVIEW  [Vol.  19:989 

declared  its  intention  to  bill  NCBCBS-insured  patients  for  the  balance 
of  the  full  fee." 

Sadly,  NCBCBS  could  not  hope  to  carry  the  day  for  several  reasons. 
First,  like  most  other  Blue  Shield  plans,  NCBCBS  was  committed  in  its 
contracts  with  subscribers  to  pay  up  to  the  UCR  limit.  To  NCBCBS, 
this  meant  that,  once  the  procedure  had  been  billed  for  in  a  sufficient 
number  of  cases,  it  would  have  to  step  up  its  allowance  to  whatever 
had  become  "usual"  for  the  particular  provider  and  "customary"  in 
the  community.  Although  the  plan  might  still  challenge  a  fee  as  being 
unreasonable,  a  plan  official  at  one  point  gave  the  impression  that  the 
plan  did  not  regard  "reasonableness"  as  an  independent  check  on  usual 
and  customary  charges.^"*  At  another  point,  this  official  expressed  doubt 
that  the  unreasonableness  of  the  allowance  demanded  by  the  urologists 
could  be  established,  because  other  insurers  around  the  nation  were 
paying  it.^^  In  making  this  excuse,  however,  plan  officials  still  seemed 
to  assume  that  reasonableness  is  to  be  judged  by  what  others  do,  not 
by  objective  economic  criteria. 

A  second  reason  why  the  NCBCBS  effort  was  unlikely  to  succeed 
was  the  unhkelihood  that  price  competition  by  providers  during  the  short 
period  when  the  low  Hmit  on  NCBCBS  coverage  was  in  effect  would 
yield  price  reductions  or  reliable  yardsticks  for  future  payments.  Even 
if  patients,  faced  with  paying  the  excess  over  NCBCBS's  allowance,  had 
known  enough  to  seek  out  a  lower-cost  provider,  no  service  area  had 
more  than  one  provider  during  the  crucial  period.  In  addition,  providers 
would  have  known  that  the  UCR  level  would  jump  dramatically  if  they 
could  resist  for  only  a  short  time  the  temptation  to  compete. 

Finally,  NCBCBS  officials  were  unwilling  to  force  a  showdown  over 
ESWL  fees  because  they  feared  that  such  a  challenge  would  induce 
urologists  across  the  state  to  refuse  to  join  NCBCBS 's  participating- 
physician  program. ^^  Ironically,  NCBCBS 's  concern  over  attracting  phy- 
sicians to  this  program  undercut  the  program's  ostensible  cost-contain- 
ment objective,  which  was  to  be  achieved  by  inducing  physicians  not 
to  balance-bill  subscribers.  In  this  instance,  plan  officials'  desire  to  make 
the  program  a  success  in  terms  of  participation  effectively  prevented 
them  from  vigorously  negotiating  with  physicians  over  an  important  cost 
item.  Of  course,  the  plan  may  have  sensed  accurately  that  no  urologists 
(other  than  perhaps  those  at  Duke,  which  may  have  higher  costs  in 

"Personal  communication  with  William  Jordan,  M.D.  (July  1985).  This  meant  that  the 
physicians  associated  with  Carohna  Lithotripsy  would  not  "participate"  in  NCBCBS  and 
that  their  patients  would  therefore  not  be  protected  from  "balance  billing."  See  supra 
note  45. 

^^Personal  communication  with  Clifford  Balin,  Director  of  Professional  Benefits, 
NCBCBS  (Nov.   1986). 

^'Personal  communication  with  CUfford  Balin,  Director  of  Professional  Benefits, 
NCBCBS  (Jan.  1987). 

''Id. 


1986]  LITHOTRIPSY  1003 

Other  respects)  would  agree  to  participate  at  the  lower  rate  and  that 
balance  billing  would  not  trigger  price  shopping  and  effective  price 
competition  in  the  highly  concentrated  ESWL  market. 

Because  the  NCBCBS  effort  was  doomed  from  the  outset,  the  gesture 
that  it  made — difficult  as  it  was  for  the  plan  officials  concerned^^ — must 
strike  an  outsider  as  a  pathetic  demonstration  of  how  ineffectual  Blue 
Cross  and  Blue  Shield  plans  generally  are  in  challenging  providers  on 
economic  issues. 

The  NCBCBS  experience  with  lithotripsy  fees  also  reveals  the  basic 
fallacies  of  the  UCR  method  of  setting  reimbursement  limits. ^^  Essentially, 
the  idea  behind  UCR  is  not,  despite  appearances,  that  market-determined 
prices  can  serve  as  a  yardstick  of  what  a  proper  allowance  might  be; 
there  is  in  fact  no  pretense  that  only  market-determined  (as  opposed  to 
insurer-reimbursed)  fees  are  considered  in  setting  UCR  limits.  Instead, 
the  premise  underlying  a  UCR  fee  ceiling  is  simply  that  the  great  majority 
of  physicians,  as  ethical  practitioners  exercising  professional  discretion, 
do  not  charge  unreasonable  or  unconscionable  prices  and  that  it  is 
therefore  necessary  only  to  compare  a  physician's  fee  with  those  of  his 
peers  to  discover  its  reasonableness.  Only  a  minute's  reflection  reveals 
how  completely  this  conception  of  how  professional  services  should  be 
priced  embodies  the  ideology  of  organized  medicine,  with  its  strong 
opposition  to  any  arrangement  inviting  price  competition  among  phy- 
sicians. It  is  apparent  then  how  NCBCBS,  like  other  Blue  Cross  and 
Blue  Shield  plans  that  have  followed  similar  policies,  serves  the  interests 
of  a  medical  cartel. ^^  Only  an  insurer  that  had  been  bred  specifically — 
as  Blue  Shield  plans  were^° — for  the  purpose  of  advancing  physicians' 


"Plan  personnel  viewed  themselves — with  some  justification— as  being  courageous  in 
taking  on  the  urologists  and  indicated  that  they  would  probably  not  have  been  able  to  do  as 
much  as  they  did  had  Dr.  Paulson,  a  respected  physician,  not  come  forward  as  an  ally.  Per- 
sonal communication  with  William  DeMaria,  M.D.,  Medical  Director,  NCBCBS  (July  1985). 
One  plan  official  stated  that  the  allowance  for  ESWL  was  finally  set  at  an  amount  equal  to 
NCBCBS's  average  for  an  open  surgical  procedure.  Personal  communication  with  Clifford 
Balin,  Director  of  Professional  Benefits,  NCBCBS  (Jan.  1987).  This  allowance  was  viewed 
as  an  accomplishment  because  it  is  10%  to  25%  less  than  urologists'  actual  stated  charges 
for  lithotripsy.  Id.  However,  this  allowance  is  obviously  far  in  excess  of  that  which  NCBCBS 
sought. 

'^See  Crump  &  Maxwell,  Health  Care,  Cost  Containment,  and  the  Antitrust  Laws: 
A  Legal  and  Economic  Analysis  of  the  Pireno  Case  56  S.  Cal.  L.  Rev.  913,  915-18 
(1983)  (description  and  defense  of  the  UCR  method  of  payment);  Roe,  The  UCR  Boon- 
doggle: A  Death  Knell  for  Private  Practice!,  303  New  Eng.  J.  Med.  41  (1981)  (stating 
that  the  UCR  concept  has  failed  to  control  escalation  of  medical  costs  because  it  contains 
none  of  the  limits  appUed  to  other  services  covered  by  insurance). 

^^See  infra  text  accompanying  notes  100-21. 

^See,  e.g.,  Anderson,  Health  Services  in  the  United  States  121-32  (1985)  (ex- 
plaining that  Blue  Shield  plans  were  sponsored  by  state  and  county  medical  societies); 
Bureau  of  Competition,  FTC,  Medical  Participation  in  Control  of  Blue  Shield  and 
Certain  Other  Open-Panel  Medical  Prepayment  Plans  (Staff  Report  and  Proposed 


1004  INDIANA  LAW  REVIEW  [Vol.  19:989 

economic  interests  could  maintain  that  the  UCR  system  is  a  responsible 
way  to  disburse  the  public's  money  to  physicians. 

The  long  survival  of  the  UCR  method  for  "controlHng"  physician 
fees  might  suggest  that  consumers  approved  the  ideology  supporting  the 
practice  of  using  nonmarket  rather  than  market  mechanisms  for  procuring 
medical  services.  A  closer  look,  however,  reveals  that  because  of  ethical 
and  legal  restraints  imposed  on  contract  and  corporate  practice^^  and 
the  resistance  of  provider  cartels  to  those  payers  who  sought  to  buy 
provider  services  on  competitive  terms, ^^  consumers  were  rarely  offered 
any  alternative.  Although  recent  years  have  seen  the  growth  of  such 
alternatives  as  health  maintenance  organizations  (HMO's)  and  so-called 
preferred-provider  organizations  (PPO's),  traditional  payment  mecha- 
nisms remain  dominant  in  North  Carolina."  The  recent  experience  with 
lithotripsy  fees  provides  an  example  of  the  high  cost  that  consumers 
bear  as  a  consequence.  As  discussed  below,  this  experience,  which  is 
far  from  an  isolated  instance,  demonstrates  the  burdens  that  providers 
and  Blue  Cross  or  Blue  Shield  plans,  acting  together,  impose  on  con- 
sumers. 

B.     The  Doctors  Split  Their  Winnings 

In  another  expression  of  its  concern  about  cost  containment,  NCBCBS 
at  one  point  declared  its  opposition  to  payments  by  lithotripsy  centers 
to  physicians  merely  for  referring  patients  for  treatment. ^^  Although  these 
payments  were  represented  as  being  fees  for  follow-up  services,  NCBCBS 
personnel  feared  that  the  fees  paid  to  the  referring  physicians  were  in 
fact  unethical  fee  splitting — that  is,  rebates  or  kickbacks  paid  for  procur- 


Trade  Regulation  Rule,  April  1979)  (describing  historical  origins  of  Blue  Shield  plans  as 
creatures  of  state  and  local  medical  societies). 

^•In  American  Medical  Ass'n  v.  FTC,  638  F.2d  443  (2d  Cir.  1980),  affd  by  an 
equally  divided  Court,  455  U.S.  676  (1982),  the  court  enforced  an  FTC  decision  condemning 
professional  societies'  ethical  prohibitions  on  "contract  practice" — that  is,  physicians  con- 
tracting with  lay-controlled  intermediaries  that  might  be  viewed  as  retaiUng  professional 
services  to  the  public.  Common-law  and  statutory  restrictions  on  corporate  intermediation 
in  the  doctor/patient  relationship  have  also  interfered  with  the  ability  of  consumers  to 
employ  a  sophisticated  agent  to  select  health  care  providers  and  bargain  with  them  on 
consumers'  behalf.  See,  e.g.,  Att'y  Gen.  Op.  No.  81-1004  (Calif.,  April  7,  1982);  Rosoff, 
The  "Corporate  Practice  of  Medicine"  Doctrine:  Has  Its  Time  Passed?,  Health  Law 
Digest,  Dec.   1984,  at  1  (Supp.). 

^^See,  e.g.,  Havighurst,  Professional  Restraints  on  Innovation  in  Health  Care  Fi- 
nancing, 1978  Duke  L.J.  303,  306-19. 

"5ee  infra  notes  119-20;  see  also  Conn,  Health  Maintenance  Organizations  Arrive 
in  North  Carolina,  N.  C.  Insight,  Feb.  1985,  at  58,  62  (noting  that  there  were  36,600 
enrollees  in  North  Carolina  HMO's  in  January  1985). 

^Personal  communication  with  William  DeMaria,  M.D.,  Medical  Director,  NCBCBS 
(July  1986). 


1986]  LITHOTRIPSY  1005 

ing  the  patient's  business  for  the  center/^  NCBCBS  later  accepted 
urologists'  assurances  that  appreciable  services  were  indeed  being  provided 
following  treatment  with  ESWL/^  At  least  one  physician  receiving  such 
a  fee  viewed  it  as  a  payment  for  the  referral,  however/^  In  any  event, 
the  practice  has  not  been  discontinued/^ 

The  medical  profession  has  long  regarded  fee  splitting  as  an  unethical 
practice,  and  it  has  been  the  object  of  attention  by  licensing  authorities 
and  professional  associations  concerned  with  professional  conduct. ^^  A 
primary  concern  has  been  that  rebates  will  distort  a  physician's  profes- 
sional judgment  in  referring  a  patient  to  a  specialist,  causing  either 
referrals  for  unnecessary  care  or  the  selection  of  a  specialist  on  a  basis 
other  than  exclusive  concern  for  the  patient's  welfare.  The  issue  is  more 
complex,  however,  than  it  first  appears,  and  indeed  it  is  possible  that 
a  referral  fee  may  actually  improve  the  chances  that  a  patient  will  get 
optimal  treatment.  Without  such  an  inducement  to  refer  the  patient,  a 
primary  physician  may  be  tempted  to  provide  a  service  himself  rather 
than  allow  another  more  qualified  or  better  equipped  physician  to  earn 
the  fee.^^  In  the  case  of  a  patient  with  a  kidney  stone,  for  example,  a 
physician  might  be  induced  to  exaggerate  his  doubt  about  how  the  case 
should  be  managed  and  then  to  resolve  such  doubt  in  favor  of  medical 
management  or  surgery  rather  than  referral  for  ESWL.  As  economist 
Mark  Pauly  has  observed,  prohibitions  on  fee  splitting  may  leave  the 

^Tlan  personnel  had  two  concerns  about  payments  for  follow-up  services  to  a  referring 
physician  for  "post-procedure"  care.  First,  they  sought  assurance  that  this  payment  was 
not  merely  a  referral  fee  but  was  for  care  actually  provided.  Second,  they  wanted  to 
ensure  that  patients  had  full  knowledge  of  these  fee  arrangements.  Personal  communication 
with  CHfford  BaUn,  Director  of  Professional  Benefits,  NCBCBS  (Jan.   1987). 

^"•Id. 

^Tersonal  communication  with  John  Weinerth,  M.D.,  Associate  Professor  of  Surgery, 
Duke  University  Medical  Center  (July  1986). 

^*NCBCBS,  in  paying  the  physician's  charge  or  reimbursing  a  patient  for  a  cost 
incurred,  had  no  easy  way  of  knowing  whether  the  physician  was  sphtting  the  fee  with 
another  physician.  NCBCBS  did,  however,  refuse  to  reimburse  the  portion  of  the  lithotripsy 
professional  fee  designated  for  "after  care"  by  the  primary  urologist  unless  such  care  was 
actually  provided.  Personal  communication  with  WiUiam  DeMaria,  M.D.,  Medical  Direc- 
tor, NCBCBS  (Aug.   1986). 

"See,  e.g.,  American  Medical  Ass'n,  Principles  of  Medical  Ethics  §  6.03  (1982); 
53  Ops.  Cal.  Att'y  Gen.  117,  118  (1970)  (interpreting  the  California  prohibition).  The 
American  College  of  Surgeons  has  adopted  an  interpreting  statement  explaining  that  it 
considers  a  form  of  fee  splitting  the  practice  of  billing  a  patient  a  single  fee  for  lithotripsy 
and  then  distributing  a  portion  of  the  fee  to  the  referring  physician.  Regents  Issue  Statement 
on  Fees  for  Lithotripsy,  Am.  College  Surgeons  Bull.,  April  1986,  at  21.  The  College 
stated  that  the  charge  for  services  and  identity  of  the  provider  should  be  disclosed  to  the 
patient.  Id. 

^"As  the  supply  of  physicians  grows  and  primary  physicians  become  less  busy,  they 
may  feel  greater  pressure  to  keep  patients  rather  than  refer  them  to  specialists.  Pauly, 
The  Ethics  and  Economics  of  Kickbacks  and  Fee  Splitting,  10  Bell  J.  Econ.  344,  348 
(1979). 


1006  INDIANA  LA  W  REVIEW  [Vol.  19:989 

patient  no  less  dependent  upon  the  primary  physician's  ethical  ability 
to  subordinate  self-interest  in  making  professional  judgments. ^^  In  ad- 
dition, Pauly  notes  that  other  forms  of  reciprocity  —  cross-referrals  and 
conferral  of  other  benefits — are  practiced  and  are  condoned  or  at  least 
ignored  by  Ucensing  and  professional  authorities.  It  is  not  clear  that 
patients'  interests  would  be  adversely  affected  if  fee  splitting  were  per- 
mitted and  openly  practiced. ^^ 

From  the  perspective  of  NCBCBS  and  other,  particularly  govern- 
mental, third-party  payers,  fee  splitting  naturally  appears  as  an  instance 
of  "fraud  and  abuse. "^^  Assuming,  however,  that  the  treatment  itself 
was  needed  and  of  acceptable  quality,  it  is  not  clear  why  a  payer  should 
be  concerned  how  the  fee  that  it  has  agreed  to  pay  is  divided  among 
providers.  Although  the  willingness  of  the  referral  specialist  to  rebate 
a  portion  of  his  fee  is  a  clear  sign  that  the  fee  is  excessive,  there  is  no 
reason  to  expect  that  the  fee  would  be  reduced  if  fee  splitting  were 
prohibited.  The  irony  here  is  that  such  rebates  are  a  manifestation  of 
price  competition  among  specialists  and  proof  that  competition  can  yield 
substantial  benefits  to  anyone  who  controls  the  selection  of  the  specialist — 
something  that  traditional  third-party  payers  have  been  reluctant  to  do. 
It  is  of  course  understandable  why  NCBCBS  would  be  embarrassed  by 
unjustified  payments  to  referring  urologists;  such  payments  obviously 
come  out  of  the  excessive  fees  that  NCBCBS  has  been  unable  to  resist 
paying  for  the  procedure.  Nevertheless,  efforts  by  NCBCBS  and  profes- 
sional interests  to  suppress  fee  splitting  would  not  serve  to  lower  that 
fee  or  benefit  consumers. 

Indeed,  it  appears  once  again  that  the  consumer's  interest  may  lie 
in  fostering,  not  suppressing,  fee  splitting.  Although  at  first  glance  it 
may  not  seem  to  matter  to  consumers  how  physicians  divide  their  excessive 


^^Id.  at  349;  see  also  Schaffer  &  Holloman,  Consultation  and  Referral  Between 
Physicians  in  New  Medical  Practice  Environments,  103  Annals  Internal  Med.  600,  601 
(1985). 

^^Tort  law  and  possibly  other  legal  remedies  would  presumably  discourage  the  worst 
abuses.  Also,  if  fee  splitting  were  a  known  practice,  patients  would  be  on  their  guard, 
and  some  physicians  might  disclose  their  practice  and  share  the  savings  with  patients. 
Pauly,  supra  note  70,  at  349. 

"Indeed,  section  1877(b)(1)(A)  of  the  Social  Security  Act,  added  by  the  Medicare- 
Medicaid  Anti-fraud  and  Abuse  Amendments  of  1977,  expressly  prohibits  the  receipt  of 
"kickbacks,"  "bribes,"  and  "rebates"  made  "directly  or  indirectly,  overtly  or  covertly, 
in  cash  or  in  kind  ...  in  return  for  referring  an  individual  to  a  person  for  the  furnishing 
or  arranging  for  the  furnishing  of  any  item  or  service  for  which  payment  may  be  made 
in  whole  or  in  part  under  this  title."  42  U.S.C.  §  1395nn  (1985)  (Medicare).  See  also  id. 
§  1396h(b)  (Medicaid).  In  United  States  v.  Greber,  760  F.2d  68  (3d  Cir.  1985),  the  court 
held  that  this  statute  was  violated  if  the  fee  was  to  induce  the  physician  to  use  the  service, 
even  if  the  fee  was  also  intended  to  compensate  the  physician  for  professional  services. 
See  generally  Gebhard,  Lithotripsy  Referral  Fees:  Medicare  Fraud  and  Abuse?,  Am.  College 
Surgeons  Bull.,  April  1986,  at  16. 


1986]  LITHOTRIPSY  1007 

profits,  the  matter  is  not  so  simple.  If  a  primary  physician  expects  a 
rebate  for  referring  stone  patients  for  ESWL,  he  is  Hkely  to  increase 
his  competitive  efforts  to  attract  such  patients,  offering  price  and  other 
inducements  that  will  lower  his  net  return  and  confer  benefits  on  con- 
sumers. Again  as  Pauly  has  observed,  the  medical  profession's  historic 
opposition  to  fee  splitting  represents,  in  some  measure,  a  desire  to 
suppress  price  competition  among  specialists  and  to  remove  the  desta- 
bilizing effects  of  rebates  in  markets  for  primary  care.^''  By  the  same 
token,  consumers  would  probably  be  better  off  if  fee  splitting  were 
acknowledged  as  a  legitimate  competitive  practice.  Indeed,  competition 
in  fee  splitting  could  compensate  in  some  measure  for  the  failure  of 
NCBCBS  and  other  payers  to  force  ESWL  centers  to  compete  for  the 
opportunity  to  serve  their  insureds. 

It  would  be  claiming  too  much  to  suggest  that  the  problem  of 
obtaining  optimal  treatment  for  stone  patients  at  a  competitive  price 
would  disappear  if  fee  splitting  were  tolerated.  Questions  would  still 
exist  concerning  the  incentives  and  professional  integrity  of  referring 
physicians  and  the  ability  of  patients  or  insurers  to  detect  and  thus  deter 
physician  abuse.  Moreover,  the  high  level  of  concentration  in  ESWL 
markets  suggests  that  competition  may  not  be  effective  in  forcing  ESWL 
fees  down  to  truly  competitive  levels. ^^  Finally,  some  of  the  competitive 
strategies  employed  by  primary  physicians  to  attract  stone  patients  would 
undoubtedly  involve  wasteful  nonprice  inducements,  adopted  precisely 
because  price  competition  is  unavailing  when  patients  are  heavily  insured. 
Despite  these  reservations,  however,  the  problems  uncovered  in  the  ex- 
isting system  make  it  highly  probable  that  efficient  allocation  of  resources 
is  more  likely  to  be  approached  under  open  competition  than  under  the 
conventional  arrangements  sponsored  by  NCBCBS  and  favored  and  fos- 
tered by  organized  medicine. 

IV.     The  Coming  Show-down — Buying  and  Selling  ESWL 
Under  the  Nevs^  Rules 

North  Carolina's  deregulation  of  lithotripters  prompts  speculation 
about  the  outcome  of  the  new  hthotripsy  game.  Many  bettors  predict 


^"Pauly,  supra  note  70,  at  348.  For  other  instances  in  which  prohibitions  of  rebating 
served  anticompetitive  purposes,  see  Department  of  Ins.  v.  Dade  County  Consumer  Ad- 
vocate's Office,  492  So.  2d  1032  (Fla.  1986)  (statute  prohibiting  rebates  to  consumers  by 
insurance  agents  held  unconstitutional);  Owen,  Kickbacks,  Specialization,  Price  Fixing, 
and  Efficiency  in  Residential  Real  Estate  Markets,  29  Stan.  L.  Rev.  931,  949-55  (1977) 
(title  insurer's  rebates  to  brokers). 

^^Given  the  oligopohstic  character  of  the  ESWL  market,  the  amount  of  the  rebate 
is  likely  to  become  standardized  through  tacit  collusion.  See  infra  text  accompanying  note 
91. 


1008  INDIANA  LAW  REVIEW  [Vol.  19:989 

that  North  Carolina  citizens  will  lose,  incurring  substantially  higher  costs 
without  enjoying  commensurate  benefits.  Although  a  consumer  victory 
can  be  imagined,  it  remains  to  be  seen  whether  the  players  fielded  by 
consumer  interests,  particularly  NCBCBS,  will  change  their  strategy  and 
improve  their  performance  enough  to  produce  an  outcome  different  from 
that  envisioned  by  the  oddsmakers. 

A.     Prospects  for  a  Consumer  Defeat 

If  payment  systems  retain  the  forms  favored  by  NCBCBS  and  pro- 
viders. North  Carolinians  face  the  prospect  that  they  will  have  to  pay 
in  full  the  costs  of  purchasing  and  maintaining  an  excessive  number  of 
costly  lithotripters.  In  a  normal  competitive  market,  consumers  are  ben- 
efitted, not  harmed,  by  excess  producer  capacity.  As  sellers  ignore  their 
"sunk"  costs — that  is,  those  investments  that  cannot  be  recovered  by 
withdrawing  from  the  market — competition  causes  unit  prices  to  fall 
below  average  total  cost,  giving  consumers  a  bargain  until  equilibrium 
is  restored  by  the  withdrawal  of  some  capacity. ^^  Competitive  conditions 
also  deter  the  creation  of  inefficient  overcapacity  because  a  would-be 
investor  could  not  expect  to  recover  his  investment  in  new  facilities 
unless  existing  facilities  were  either  inadequate  or  relatively  inefficient. 
In  health  care,  unfortunately,  because  traditional  reimbursement  mech- 
anisms give  patients  little  reason  to  shop  for  low  prices,  it  has  not  been 
possible  to  count  on  competition  to  drive  prices  below  average  total 
cost  and  to  discourage  overinvestment.  If  would-be  investors  in  North 
Carolina  lithotripters  currently  believe  that  existing  financing  arrange- 
ments are  not  likely  to  change  before  they  have  recovered  their  capital 
outlays,''^  North  Carolina  consumers  do  indeed  face  unjustified  higher 
costs  as  a  consequence  of  deregulation. 

Higher  prices  to  North  Carolinians  may  also  result  from  other  causes. 
If  payment  systems  do  not  threaten  now  or  in  the  near  future  to  put 
competitive  or  other  pressure  on  high-cost  providers,  a  would-be  investor 


^^Under  competition,  prices  tend  to  equal  marginal  cost,  the  cost  of  the  last  unit 
produced.  With  overcapacity,  marginal  cost  includes  no  capital  costs.  On  the  other  hand, 
if  production  is  at  full  capacity,  marginal  cost  includes  the  cost  of  the  capacity  that  must 
be  added  to  increase  production.  See  generally  P.  Areeda,  Antitrust  Analysis  t  114- 
16  (3d  ed.   1981). 

^^An  issue  arises  concerning  the  period  over  which  an  investor  can  recover  his 
investment.  In  North  CaroUna,  ESWL  providers  have  pressed  to  have  NCBCBS  reimburse 
hospitals  for  lithotripter  depreciation  on  the  basis  of  a  two-year  useful  life;  NCBCBS  has 
argued  for  amortization  over  five  years.  Personal  communication  with  Clifford  Balin, 
Director  of  Professional  Benefits,  NCBCBS  (Aug.  1986).  NCBCBS  has  resolved  the 
dispute.  Id.  Obviously,  a  longer  period  of  payback  increases  the  risk  that  market  conditions, 
including  insurer  practices,  will  change  in  ways  detrimental  to  providers  and  will  thus 
discourage  overinvestment  in  lithotripters. 


1986]  LITHOTRIPSY  1009 

has  no  reason  to  await  the  availabihty  of  a  lithotripter  less  costly  than 
the  Dornier  device.  In  addition,  consumers  cannot  expect  to  enjoy  across- 
the-board  cost  savings  when  lower-cost  devices  do  appear;  they  would 
instead,  under  prevalent  cost-reimbursement  formulas,  continue  to  pay 
the  full  depreciation  costs  of  obsolete  equipment. ^^  Finally,  the  absence 
of  effective  price  competition  would  also  allow  providers  who  are  not 
reimbursed  strictly  on  the  basis  of  costs  actually  incurred — physicians, 
in  particular — to  charge  prices  well  in  excess  of  their  costs.  It  has  already 
been  shown  how  UCR  allowances  in  North  Carolina  represent  excessive 
payments  for  professional  services.  The  ability  of  physicians  to  overcharge 
for  their  role  in  ESWL  reflects  the  noncompetitive  conditions  prevalent 
in  that  market.  Unfortunately,  unless  changes  occur  in  payment  systems, 
ehminating  CON-protected  monopolies  of  ESWL  may  not  bring  prices 
down. 

A  proliferation  of  lithotripters  might  also  trigger  higher  health  care 
costs  in  the  form  of  overuse  of  the  devices  to  treat  stone  patients  who 
could  be  managed  satisfactorily  at  much  less  expense  without  resorting 
either  to  the  device  or  to  surgery. ^^  Traditional  payment  systems  offer 
only  weak  defenses  against  such  overutilization.  One  theory  supporting 
CON  regulation  was  that  supply  could  be  curtailed  to  an  extent  that 


^^The  Medicare  program's  position  regarding  capital  costs  is  very  much  in  limbo  at 
the  moment,  contributing  substantially  to  the  uncertainty  facing  would-be  investors  in 
North  Carohna  lithotripters.  Currently,  under  Medicare's  prospective  payment  system, 
capital  costs  (depreciation,  interest,  and  return-on-equity  for  for-profit  institutions)  are 
not  included  as  part  of  per-case  payment  rates,  but  are  reimbursed  at  actual  cost.  See 
E.  Power,  Extracorporeal  Shock  Wave  Lithotripsy  and  the  Medicare  Prospective 
Payment  System  8,  14  (1985).  Because  hospitals  are  assured  coverage  of  the  acquisition 
costs,  hospitals  are  encouraged  to  acquire  new  technologies.  Id.  at  19. 

However,  the  Reagan  Administration  has  proposed  a  plan  to  phase  Medicare  capital 
payments  into  DRG's  over  a  four-year  transition  period,  beginning  with  fiscal  year  1987 
cost  reports.  Firshein,  HHS  Capital  Plan  Arouses  Provider  Anxieties,  Hospitals,  June 
20,  1986,  at  24  [hereinafter  HHS  Capital  Plan].  Payments  would  be  based  on  hospital- 
specific  and  national  rates,  with  fiscal  year  1983  cost  reports  trended  forward.  Firshein, 
Providers  Call  '87  PPS  Increase  'Unacceptable',  Hospitals,  July  5,  1986,  at  31. 

Meanwhile,  hospitals  and  other  providers  are  urging  Congress  to  intervene.  Id.  Senator 
David  Durenberger  (Rep. -Minn.)  has  proposed  a  plan  to  fold  Medicare  capital  payments 
into  DRG's  over  a  seven  year  period.  HHS  Capital  Plan,  supra,  at  24.  In  addition,  both 
the  House  and  Senate  have  approved  a  supplemental  appropriations  bill  that  includes  a 
one-year  moratorium  on  inclusion  of  capital  costs.  Hospital  Shouldn't  Wait  to  Evaluate 
Medicare  Changes  for  Fiscal  Year  1987,  4  Prospective  Payment  Survival  108  (1986). 

''Even  though  efficiency  considerations  may  dictate  using  ESWL  in  many  cases  if 
overcapacity  already  exists,  new  capital  investments  enabling  the  provision  of  ESWL  in 
identical  cases  would  not  necessarily  be  indicated.  This  anomaly  results  because,  if  the 
capacity  is  not  already  in  place,  the  marginal  cost  of  additional  treatments,  which  must 
be  compared  to  the  advantages  of  ESWL  over  alternative  therapy,  includes  the  cost  of 
new  capacity  and  is  therefore  significantly  higher  than  it  would  be  if  a  lithotripter  were 
standing  idle.  See  supra  note  76. 


1010  INDIANA  LAW  REVIEW  [Vol.  19:989 

would  force  health  care  providers  to  ration  limited  resources  to  their 
best  uses.  Political  conditions,  however,  have  usually  made  it  impossible 
for  CON  regulators  to  challenge  medical  opinion  on  appropriate  utiU- 
zation  or  to  do  more  than  try  to  prevent  the  creation  of  unused  capacity. ^^ 
Although  CON  regulation  has  therefore  probably  done  little  to  contain 
the  excess  demand  for  services  induced  by  passive  insurance  plans, ^^  the 
lifting  of  CON  restrictions,  by  removing  the  occasion  for  regulatory 
determinations  of  need,  may  have  created  some  additional  risk  that 
physicians  will  extend  their  use  of  ESWL  technology  well  beyond  the 
point  at  which  its  benefits  are  at  least  equal  to  its  cost  of  roughly  $6,000 
per  procedure. ^^  Lacking  the  ability  to  resist  paying  for  all  services  that 


^'^See  C.  Havighurst,  supra  note  13,  at  36  (reporting  an  informal  survey  indicating 
that  CON  regulators  see  their  role  only  as  preventing  duplication,  not  as  forcing  rationing). 

^^See  references  cited  note  40  supra.  See  also  C.  Havighurst,  supra  note  13,  at  58- 
63  (demonstrating  graphically  how  "inflationary  pressures  [attributable  to  passive  insurance 
plans]  may,  like  a  balloon,  bulge  out  at  another  place  even  if  growth  in  one  direction 
is  effectively  prevented"). 

^^Indeed,  North  Carolina  urologists  have  already  begun  to  suggest  that  the  device 
is  appropriately  employed  to  treat  stones  that  are  small  enough  to  pass  (with  some 
discomfort,  to  be  sure)  through  the  urinary  tract.  E.g.,  Personal  communication  with 
John  Weinerth,  M.D.,  Chief  of  Urolithiasis  Service  and  Associate  Professor  of  Surgery, 
Duke  University  School  of  Medicine  (July  1986).  Elsewhere  urologists  are  finding  other 
possible  uses  for  lithotripsy,  including  its  use  against  gallstones.  See  Sauerbruch,  Erag- 
mentation  of  Gallstones  by  Extracorporeal  Shock  Waves,  314  Nev^  Eng.  J.  Med.  818 
(1986).  The  procedure  may  also  be  useful  against  bladder  and  kidney  tumors.  See  Russo, 
High  Energy  Shock  Waves  Suppress  Tumor  Growth  in  Vitro  and  in  Vivo,  135  J.  Urology 
626  (1986);  Shock  Waves  Being  Used  to  Bombard  Cancer,  Durham  Morning  Herald,  Nov. 
17,  1986,  at  IB,  col.  1. 

The  "need"  for  lithotripsy  and  indeed  for  most  medical  services  is  difficult  to  determine 
for  several  reasons.  Most  observers  are  much  more  comfortable  in  asking  simply  whether 
the  service  is  at  all  beneficial  than  in  judging  whether  beneficial  treatment  is  appropriate 
by  comparing  benefits  with  marginal  cost.  Moreover,  the  variability  of  marginal  cost  noted 
supra  notes  76  and  79  reveals  that  appropriateness  may  depend  on  the  availability  of 
unused  equipment  and  not  exclusively  on  medical  circumstances.  The  resolution  of  the 
need  question  is  also  complicated  by  partisanship.  In  utilization  review,  providers  tend  to 
be  liberal  in  defining  the  need  for  their  own  services.  See  generally  Havighurst  &  Blumstein, 
Coping  with  Quality/Cost  Tradeoffs  in  Medical  Care:  The  Role  of  PSROs,  70  Nw.  U.L. 
Rev.  6  (1975).  In  CON  review,  the  "haves"  tend  to  minimize  need  and  the  "have-nots" 
to  exaggerate  it. 

One  Duke  physician  has  stated  that  the  studies  used  by  the  North  Carolina  CON 
agency  greatly  underestimated  the  need  for  lithotripsy.  Personal  communication  with  John 
Weinerth,  M.D.,  Chief  of  Urolithiasis  Service  and  Associate  Professor  of  Surgery,  Duke 
University  School  of  Medicine  (Aug.  1986).  The  North  Carolina  Work  Group  Report, 
prepared  by  physicians  and  administrators,  estimated  that  approximately  20%  of  renal 
stone  patients  would  be  lithotripsy  candidates.  See  North  Carolina  Lithotripter  Work  Group 
Report  (June  14,  1985).  Weinerth  argued,  however,  that  recent  unpublished  reports  from 
lithotripsy  centers  throughout  the  United  States  indicate  that  85%  of  all  renal  stone  patients 
would  benefit  from  lithotripsy.  Weinerth  explained  that  certain  types  of  patients  that  were 
previously  thought  ineligible  for  lithotripsy,  such  as  pediatric  patients,  patients  with  bilateral 
stones,  and  patients  with  staghorn  calculi,  may  be  hthotripsy  candidates.  However,  a  study 


1986]  LITHOTRIPSY  1011 

physicians  prescribe  in  good  faith,  traditional  health  insurers  expose 
North  Carolina  consumers  to  yet  another  source  of  unjustified  higher 
costs. 

B.     Available  Defenses 

If  unjustified  cost  increases  of  the  foregoing  kinds  are  to  be  averted 
in  North  Carolina,  insurers  of  ESWL  must  find  ways  of  limiting  the 
fees  and  charges  they  will  pay  and  of  ensuring  that  only  justified  services 
are  provided.  The  defensive  strategies  available  include  writing  insurance 
policies  that  restrict  coverage  of  the  procedure,  limit  the  amount  payable 
for  it,  or  deny  or  limit  coverage  of  the  ESWL  services  of  particular 
providers. ^^  Vigorous  implementation  of  these  approaches  would  be  incon- 
sistent with  the  practices  of  traditional  insurers,  however,  being  more  like 
the  choice-Hmiting  methods  of  HMO's,  PPO's,  and  other  alternative 
financing  and  delivery  mechanisms.  Because  financing  plans  of  the  latter 
types  enroll  only  a  small  fraction  of  insured  North  Carolinians,^^  cost 
escalation  is  highly  Hkely  unless  fundamental  changes  occur  in  the  coverage 
enjoyed  by  the  great  majority  of  citizens.  The  small  increases  in  the  overall 
cost  of  traditional  health  insurance  that  are  attributable  to  the  deregula- 
tion of  lithotripters  are  unlikely  in  themselves  to  induce  a  significant  shift 
to  alternative  health  plans. 

Perhaps  the  easiest  cost-containment  strategy  for  controlling  over- 
utilization  of  ESWL  is  a  contractual  Hmitation  of  the  plan's  obligation 
to  pay  for  the  service  in  the  absence  of  specified  medical  indications. 
As  a  practical  matter,  however,  such  a  contractual  condition  of  coverage 
is  difficult  to  administer.  For  example,  enforcement  of  a  provision 
denying  coverage  for  the  shattering  of  small  stones  below  two  miUimeters^^ 


at  Shands  Hospital  of  the  University  of  Florida  estimated  that  even  fewer  renal  stone 
patients  would  be  lithotripsy  candidates.  See  Memorandum  from  Shands  Hospital  to  All 
State  Health  Planning  Agencies  (April  17,  1985).  Shands  Hospital  was  involved  in  the 
cHnical  testing  of  the  lithotripter  and  thus  was  among  the  first  to  receive  the  machine. 
Weinerth  explained  that  the  Shands  group  may  have  been  overly  conservative  in  their 
estimate  of  the  need  for  lithotripsy  because  they  had  no  interest  in  having  a  large  number 
of  lithotripsy  centers  enter  the  market. 

"For  a  general  discussion  of  cost-control  strategies  available  to  private  financing 
programs,  see  Havighurst  &  Hackbarth,  Private  Cost  Containment,  300  N.  Eng.  J.  Med. 
1298  (1979). 

""^See  infra  note  120. 

^^See  Drach,  Urinary  Lithiasis,  in  Campbell's  Urology  1123  (5th  ed.  1986)  (stating 
most  urinary  stones  less  than  5  mm  will  pass  spontaneously  and  patients  with  small  stones 
may  be  treated  with  pain  relief  and  instructions  about  recovery  of  stone).  See  also  Preminger, 
The  Current  Role  of  Medical  Treatment  of  Nephrolithiasis:  The  Impact  of  Improved 
Techniques  of  Stone  Removal,  134  J.  Urology  6,  6,  9  (1985)  (stating  that  in  a  study  of 
103  consecutive  stone  clinic  patients,  only  2%  of  the  patients  on  medical  therapy  required 
an  operation  for  newly  formed  stones,  whereas  58%  to  69%  required  an  operation  for 
new  stones  before  beginning  medical  treatment;  noting  that  the  cost  of  management  is 
less  than  $1,000  per  year). 


1012  INDIANA  LAW  REVIEW  [Vol.  19:989 

would  require  either  that  the  plan  accept  the  physician's  representation 
of  the  stone's  size  or  that  x-ray  evidence  be  obtained  before  the  procedure. 
Enforcement  of  an  evidentiary  requirement  by  denial  of  coverage  would 
be  unreasonable,  however,  unless  the  patient  or  the  physician  knew  of 
it  in  advance.  Not  only  are  patients  unlikely  to  be  aware  of  such 
administrative  details,  but  physicians  may  also  be  unaware  or  may  refuse 
to  cooperate,  insisting  that  the  insurer  should  accept  either  their  rep- 
resentations of  the  facts  or  their  clinical  judgments  concerning  patients' 
needs.  In  a  similar  situation,  Indiana  dentists  organized  a  concerted 
refusal  to  provide  x-rays  to  dental  insurers  for  cost-containment  purposes. 
Although  that  conspiracy  was  held  to  be  an  antitrust  violation,^^  individual 
refusals  to  cooperate  with  insurers  are  to  be  anticipated.^^  Urologists 
might  well  claim  that  individual  cases  differ  so  that  medical  necessity 
cannot  be  determined  without  a  fuller  medical  inquiry.  Consequently, 
given  the  burdens  associated  with  coverage  restrictions  and  their  un- 
popularity with  patients  and  providers  alike,  it  appears  improbable  that 
the  possibility  of  saving  a  few  dollars  on  claims  for  ESWL  will  alone 
trigger  adoption  of  these  strategies  by  North  Carolina  insurers. 

North  Carolina  insurers  might  bring  unit  prices  and  utilization  under 
some  control  by  increasing  cost  sharing  by  patients,  by  tightening  limits 
on  reimbursable  fees,  or  by  shifting  to  fixed-indemnity  coverage.  Each 
of  these  approaches  would  be  aimed  at  reducing  the  insurer's  exposure 
and  increasing  the  consumer's  financial  stake  in  each  transaction  in  the 
expectation  that  he  will  shop  for  care  with  cost  considerations  more 
prominently  in  mind.  Consumers  may  not  be  happy,  however,  to  accept 
these  new  responsibilities  and  increased  financial  burdens.  Moreover, 
there  is  little  reason  to  believe  that  consumers  would  be  especially  effective 
shoppers  or  that  conditions  conducive  to  price  competition  prevail  in 
the  market  for  ESWL.  Although  a  fixed  indemnity  payment  for  ESWL 
would  seem  to  be  a  sensible  policy  and  one  that  a  particular  insurer 
could  rather  easily  adopt,  strategies  of  this  kind  have  been  freely  available 
to  all  insurers  for  a  long  time  but  have  rarely  been  employed.   It  is 


«^FTC  V.  Indiana  Fed'n  of  Dentists,  106  S.  Ct.  2009  (1986). 

*^A  legal  issue  would  arise  if  a  physician  billed  for  a  service  he  had  rendered 
knowingly  without  complying  with  the  preconditions  of  the  patient's  insurance.  Although 
precedent  is  scanty,  cf.  Eisenberg  &  Rosoff,  Physician  Responsibility  for  the  Cost  of 
Unnecessary  Medical  Services,  299  N.  Eng.  J.  Med.  76  (1978),  such  a  negligent  failure 
to  meet  the  patient's  needs  would  seem  to  open  the  physician  to  professional  liabiUty  for 
damages  equal  to  the  amount  of  insurance  reimbursement  lost.  However,  even  though  a 
patient  might  thus  successfully  resist  a  suit  to  collect  the  physician's  bill,  an  insurer  would 
undoubtedly  find  it  both  awkward  to  deny  the  patient's  claim  and  difficult  to  ensure  that 
physicians  were  aware  of  its  requirements  and  their  applicability  to  particular  patients. 
Nevertheless,  some  insurers  have  required  patients  to  obtain  either  second  opinions  on 
the  need  for  treatment  or  the  insurer's  prior  authorization  of  coverage  for  such  elective 
procedures. 


1986]  LITHOTRIPSY  1013 

unlikely  that  the  deregulation  of  ESWL  poses  enough  of  a  threat  of 
cost  escalation  to  prompt  significant  redesign  of  coverage  along  these 
lines. 

The  most  practical  and  effective  approach  to  cost  containment  in 
private  health  insurance  would  concentrate  not  on  writing  selective  cov- 
erage of  ESWL  or  shifting  costs  from  the  insurer  to  its  insureds,  but 
on  excluding  certain  providers  altogether  from  eligibility  to  provide 
covered  services.  This  approach,  however,  would  violate  the  principle 
of  free  choice  of  provider  that  is  embedded  in  the  standard  coverage 
offered  by  NCBCBS  and  strongly  favored  by  health  care  providers.  Such 
exclusion  would  also  violate  North  Carolina  law,  which  permits  insurers 
to  cover  the  services  of  designated  "preferred  providers"  on  more  fa- 
vorable terms  but  prohibits  an  insurer  from  excluding  providers  com- 
pletely from  treating  insured  patients  at  the  insurer's  expense. ^^  Thus, 
although  the  abihty  to  exclude  a  high-cost  or  uncooperative  provider 
altogether  from  plan  coverage  might  allow  an  insurer  to  obtain  even 
more  favorable  results.  North  Carolina  insurers  wishing  to  procure  ESWL 
services  for  their  insureds  on  favorable  terms  must  employ  the  PPO 
mechanism.  ^^ 

The  potential  value  to  consumers  of  letting  the  insurer  act  as  a 
middleman  in  procuring  hospital  and  physician  services  is  powerfully 
demonstrated  by  the  ESWL  situation  in  North  Carolina.  If  an  insurer 
could  deliver  paying  patients  to  a  provider  by  designating  it  as  either 
the  exclusive  or  a  preferred  provider  of  insured  services,  the  insurer 
could  bargain  for  a  fair  price  both  from  the  hospital  for  use  of  the 
lithotripter  and  from  the  physician  presiding  over  the  procedure.'"  In 
addition,  the  insurer  could  seek  providers'  cooperation  with  its  efforts 
to  control  overutilization.  Conversely,  an  insurer,  such  as  NCBCBS,  that 
feels  constrained  to  cover  care  at  all  centers  on  equal  terms  lacks  the 
ability  to  steer  patients  away  from  a  high-cost  provider  and  therefore 
has  no  bargaining  power. 


«8N.C.  Gen  Stat.  §§  57-16.1,  58-260.5  -.6  (1985). 

^^On  the  PPO  concept,  see  generally  P.  Lindsey,  State  Laws  and  Regulations 
Governing  Preferred  Provider  Organizations:  Annotated  Bibliography  on  Preferred 
Provider  Organizations  (1986);  E.  Rolph,  State  Laws  and  Regulations  Governing 
Preferred  Provider  Organizations  (1986);  E.  Rolph,  State  Laws  and  Regulations 
Governing  Preferred  Provider  Organizations:  Executive  Summary  (1986). 

'"The  practice  of  fee  splitting,  see  supra  text  accompanying  notes  73-75  suggests 
that  price  competition  is  indeed  feasible  if  a  payer  is  willing  to  influence  insured  patients 
to  select  the  low-cost  provider.  NCBCBS  claims  that  it  has  been  able  to  negotiate  with 
providers  on  the  machine  use  fee.  Under  the  plan's  provider  contracts,  the  professional 
fee  is  reimbursed  at  a  UCR  rate,  but  the  facility  fee  is  negotiated,  taking  into  account 
the  provider's  costs.  Personal  communication  with  WilUam  DeMaria,  M.D.,  Medical 
Director,  NCBCBS  (Aug.  1986).  See  supra  note  77.  Because  NCBCBS  does  nothing  to  steer 
its  insureds  to  lower-priced  centers,  however,  its  bargaining  power  is  minimal. 


1014  INDIANA  LAW  REVIEW  [Vol.  19:989 

Despite  the  theoretical  potential  for  obtaining  competitive  terms  from 
providers  through  hard  bargaining,  the  small  number  of  providers  of 
ESWL  makes  the  real-world  prospects  for  effective  bargaining  proble- 
matic. In  any  oligopolistic  industry,  the  danger  exists  that  each  of  the 
few  competitors  will  realize  that  any  aggressive  competitive  move  that 
it  might  make  in  search  of  a  short-run  advantage  would  simply  cause 
its  competitors  quickly  to  follow  suit,  making  all  of  them  worse  off  in 
the  long  run.  With  this  perception  of  their  "interdependence,"  the 
oligopolists  are  each  likely  to  refrain  from  competitive  moves,  producing 
essentially  the  same  result  as  if  they  had  agreed  explicitly  not  to  compete. ^^ 
In  addition  to  creating  conditions  conducive  to  tacit  collusion,  the  small 
number  of  competitors  in  the  market  also  facilitates  explicit  agreements 
in  restraint  of  trade.  Even  if  ESWL  providers  did  not  actually  fix  prices, 
they  might  well  agree,  tacitly  or  overtly,  to  eschew  competitive  contracting 
with  insurers.  It  is  highly  probable  that  an  insurer  seeking  a  beneficial 
contract  for  ESWL  services  in  a  market  with  few  sellers  would  encounter 
substantial  resistance  to  its  proposals. 

In  keeping  with  the  prediction  that  a  concentrated  provider  market 
is  unlikely  to  be  competitive.  North  Carolina  HMO's  reported  before 
deregulation  that  they  anticipated  no  success  in  obtaining  lithotripsy  on 
special  terms  for  their  patients.  Deregulation  of  lithotripsy  may  have 
significantly  improved  the  prospects  for  competitive  bidding,  however. ^^ 
With  deregulation,  a  payer  may  now  shop  not  only  among  the  five 
providers  originally  in  the  market,  but  also  among  providers  who  were 
previously  barred  from  entry.  Indeed,  Duke,  which  already  has  a  lith- 
otripter  and  has  signified  a  willingness  to  accept  a  small  professional 
fee,  may  be  a  lower-priced  source  of  treatment.  Even  if  Duke  turns  out 
to  be  no  cheaper  overall  or  inadequately  cooperative  with  insurers' 
utilization-control  efforts,  the  possibility  remains  that  an  insurer,  acting 


"On  oligopolists'  interdependence,  see  generally  6  P.  Areeda,  Antitrust  Law 
1  1428-36  (1986). 

^^The  CON  program  previously  hindered  the  efforts  of  payers  to  obtain  lithotripsy 
at  competitive  prices.  Dr.  Lawrence  Oakes,  Medical  Director  for  the  Kaiser-Permanente 
plan  in  North  Carolina,  explained  that  if  there  are  a  number  of  providers  of  a  medical 
service  in  a  given  area.  Kaiser  can  award  an  exclusive  contract  to  the  lowest-cost  provider. 
Personal  communication  with  Lawrence  Oakes,  M.D.  (June  1985).  This  type  of  bargaining, 
however,  is  impossible  in  a  monopolistic  situation.  Dr.  Samuel  Warburton,  Vice  President 
of  the  Health  America  plan  in  North  Carolina,  reported  that  prior  to  deregulation,  he 
was  unable  to  negotiate  a  urologist's  fee  for  lithotripsy  that  was  close  to  what  he  believed 
to  be  a  competitive  price.  Personal  communication  with  Samuel  Warburton,  M.D.  (June 
1985).  Since  deregulation,  the  plan  has  obtained  a  more  satisfactory  price.  Warburton 
explained  that,  with  prices  for  ESWL  as  high  as  $12,000  per  procedure.  Health  America 
has  been  able  to  obtain  a  $4,300  total  fee  for  an  uncomplicated  renal  stone  procedure. 
Personal  communication  with  Samuel  Warburton,  M.D.  (Oct.  1986).  Warburton  said  he 
anticipates  that  he  may  be  able  to  bargain  for  a  total  fee  of  $2,500  in  1987.  Id. 


1986]  LITHOTRIPSY  1015 

independently  or  in  concert  with  others,  could  stimulate  the  entry  of 
yet  another,  lower-cost  provider  by  offering  it  a  long-term  contract  as 
the  exclusive  or  preferred  provider  of  ESWL  services  to  its  subscribers. 
Armed  with  the  threat  to  pursue  this  newly  available  strategy,  an  insurer 
should  find  existing  providers  more  willing  to  bargain  for  its  business. 
It  is  paradoxical  but  crucial  that  repeal  of  CON  requirements  can  generate 
pressure  for  lower  prices  even  if  no  new  entrant  actually  materializes.^^ 
Potential  competition  is  frequently  more  effective  than  actual  competition 
in  keeping  prices  down  in  concentrated  markets. 

Despite  the  foregoing  theoretical  possibilities  for  effective  cost  con- 
tainment, NCBCBS  has  so  far  made  no  move  to  change  its  methods 
of  purchasing  ESWL,^"^  and  other  insurers,  with  a  smaller  overall  stake, 
are  even  less  likely  to  take  specific  steps  to  control  the  costs  of  ESWL 
in  a  deregulated  environment.  The  financing  system  thus  remains,  as  it 
was  before  deregulation,  an  invitation  to  overinvestment  in  lithotripters. 
Because  North  Carolina  payers  lack  the  ability  or  the  will  to  control 
overutilization  of  ESWL  and  to  buy  cheaply  in  an  overstocked  market, 
North  Carolina  consumers  face  the  prospect  of  a  costly  defeat  in  the 
new  phase  of  the  lithotripsy  game. 

V.     Making  the  Game  Competitive 

An  informal  survey  following  the  1986  deregulation  of  ESWL  by 
the  North  Carolina  legislature  revealed  no  provider  with  plans  to  install 
a  Hthotripter  in  the  state  other  than  the  seven  original  aspirants,  each 
of  which  was  finally  successful  in  negotiating  the  regulatory/poUtical 
path  to  market  entry — four  by  obtaining  CON's,  one  (Piedmont)  by 
exploiting  a  statutory  loophole  for  nonhospital-based  equipment,  and 
two  (Duke  and  St.  Joseph's)  by  getting  legislative  assistance. ^^  It  is  a 
mistake  to  conclude,  however,  because  deregulation  failed  to  trigger  a  burst 
of  new  investment,  that  market  forces  are  satisfactorily  controlling  ESWL 
costs  in  North  Carolina.  Instead,  because  seven  lithotripters  appear 
themselves  to  be  too  many  to  service  the  state  efficiently,  it  can  be 
observed  that  regulation  itself  failed  to  prevent  the  creation  of  excess 
capacity. "^^  More  generally,  it  can  be  suggested  that  CON  regulation, 


"C/".  C.  Havighurst,  supra  note  13,  at  234-36  (discussing  how  allowing  HMO's  to 
build  new  hospital  facilities  without  a  CON  stimulates  not  new  hospitals,  but  greater 
willingness  of  existing  institutions  to  bargain  with  HMO's). 

^''Personal  communication  with  WiUiam  DeMaria,  M.D.,  Medical  Director,  NCBCBS 
(Nov.  1986)  (stating  that  NCBCBS  was  contractually  bound  in  its  subscriber  contracts  to 
pay  the  UCR  reimbursement  to  providers). 

^^See  supra  notes  16-36  and  accompanying  text. 

^^It  seems  appropriate  to  count  the  Duke  and  St.  Joseph's  lithotripters  as  entering 
the  market  under  regulation,  not  deregulation.  See  supra  notes  25-36  and  accompanying 
text. 


1016  INDIANA  LAW  REVIEW  [Vol.  19:989 

almost  inevitably  politicized,  provides  unreliable  protection  for  consumer 
interests  whenever  the  financing  system  creates  a  lucrative  market  op- 
portunity for  providers.  But  whatever  the  final  conclusion  concerning 
regulation's  value, ^^  North  Carolina's  ESWL  experience  underscores  that 
the  fundamental  source  of  the  problem  of  overspending  on  health  care 
is  the  dominant  system  of  financing  services.  Under  regulation,  that 
system  created  powerful  incentives  for  North  Carolina  providers  to  ov- 
erexpand  ESWL  and  gave  rise  to  pressures  that  were  impossible  for  the 
regulators  and  the  political  system  to  contain  or  to  resist.  Following 
deregulation,  the  financing  system's  chronic  inability  to  take  advantage 
of  what  should  be  a  buyer's  market  for  ESWL  leaves  North  CaroUna 
providers  free  to  create  unneeded,  inefficient  capacity  and  to  operate  it 
profitably  at  the  pubhc's  expense. 

Health  care  financing  in  North  Carolina  is  typical  of  that  found  in 
most  other  markets  for  health  services.  Although  there  are  increasing 
reports  of  major  outbreaks  of  competitive  buying  and  selling  of  provider 
services  in  many  places  throughout  the  nation,  traditional  financing  as 
found  in  North  Carolina  remains  the  norm,  and  truly  independent  and 
competitive  systems  remain  exceptional.^^  Despite  the  hopeful  signs  of 
effective  competition  in  some  markets,  the  ineffectiveness  of  the  dominant 
health  insurance  mechanisms  in  controlling  the  price  and  cost  of  all 
health  services,  not  just  ESWL,  has  been  notable  for  so  long  that  one 
must  wonder  whether  the  game  being  played  was  or  is  a  fair  one^^  and 
whether  a  fundamental  change  in  its  rules  may  be  necessary. 

A.     Is  the  Game  Rigged?— ''Say  It  Ain't  So,  Joe!'* 

The  historical  failure  of  conventional  health  care  financing  systems 
to  defend  consumer  interests  invites  attention  to  the  possibility  that  some 
of  the  players  whom  the  fans  have  been  supporting  against  providers 


^^Deregulation  might  be  safer  if  prepared  for  in  advance.  Recent  deregulation  in 
Arizona  and  Utah  is  alleged  to  have  triggered  a  burst  of  capital  spending.  See  Arizona 
Deregulation  Spurs  Growth  in  Medical  Facilities,  Am.  Med.  News,  September  19,  1986, 
at  7  (Arizona  is  experiencing  an  "unprecedented  growth"  in  health  care  facilities  as  a 
result  of  repeal  of  CON  regulations  for  hospitals  and  nursing  homes).  Although  no  objective 
evaluations  of  these  experiences  (by  persons  other  than  the  displaced  planners  and  regulators 
themselves)  have  been  done,  there  may  be  some  reason  for  concern.  For  a  full  statement 
of  the  case  for  deregulation  and  strategies  for  achieving  it,  see  generally  C.  Havighurst, 
supra  note  13. 

''See  infra  notes  119-20. 

^A  major  source  of  unfairness  to  consumers  has  been  providers'  success  in  establishing 
the  rules  of  competition  in  the  health  care  sector.  See,  e.g.,  Havighurst,  supra  note  62 
(discussing  restrictions  imposed  by  providers  on  insurers'  freedom  to  control  costs  and 
the  potential  value  of  antitrust  law  in  eliminating  such  restrictions).  Blue  Cross  and  Blue 
Shield  plans  are  also  implicated  in  providers'  efforts  to  make  and  enforce  the  rules  of 
the  game.  See  infra  text  accompanying  notes  104-09. 


1986]  LITHOTRIPSY  1017 

may  not  have  been  playing  to  win.  Unthinkable  as  this  hypothesis  may 
seem,  the  failure  of  NCBCBS  to  defend  effectively  against  providers  of 
ESWL  is  not  just  an  isolated  collapse  attributable  to  one  plan's  poor 
management  and  lack  of  skilled  players.  Other  teams  in  Blue  uniforms 
have  also  consistently  failed  to  strive  for  a  consumer  victory,  appearing 
instead  to  have  joined  with  providers  to  rig  the  outcome.  Not  only  did 
the  Blues  themselves  perform  badly  in  the  cost-containment  field,  but, 
as  the  following  discussion  briefly  explains,  their  policies  were  instru- 
mental in  handicapping  HMO's  and  commercial  health  insurers — other 
teams  on  which  consumers  might  have  placed  their  bets.^^° 

The  reason  why  many  Blue  Cross  and  Blue  Shield  plans  did  not 
battle  providers  successfully  for  lower  costs  and  prices  is,  quite  simply, 
that  favoring  consumers  over  providers  was  usually  not  in  their  corporate 
interest.  Even  after  Blue  plans  were  no  longer  controlled  by  the  dominant 
hospital  and  physician  organizations  that  created  them,  they  generally 
adhered  to  a  business  policy  of  respecting  and  even  furthering  the 
economic  interests  of  their  original  sponsors. '°'  Indeed,  many  Blue  plans 
appeared  to  prosper  in  the  ensuing  years,  not  because  they  offered 
consumers  good  value  in  insurance  products,  but  because  of  the  close 
relationships  they  maintained  with  organized  providers. '^^  Together  with 


^°^See  generally  Havighurst,  Explaining  the  Questionable  Cost-Containment  Record  of 
Commercial  Health  Insurers,  in  The  Political  Economy  of  Health  Care  (H.E.  Freeh 
ed.,  to  be  published).  The  machinations  of  providers  and  Blue  Cross  and  Blue  Shield 
plans  somewhat  excuse  the  poor  cost-containment  record  of  commercial  health  insurers. 
Although  numerous  factors  affect  the  supply  of  and  demand  for  insurers'  cost-containment 
services  and  although  the  issue  is  complex,  Blue/provider  alliances,  many  of  them  informal, 
explain  why  consumer  cost  concerns  have  not  been  effectively  transmitted  to  providers  in 
the  marketplace.  Id.  For  a  recent  and  more  positive  (and  conventional)  view  of  the  Blues, 
see  Greenberg,  The  Evaluation  of  Blue  Cross  in  a  Competitive  Marketplace,  Business  & 
Health,  Nov.  1986,  at  44. 

'°' Although  the  FTC's  efforts  largely  ended  direct  physician  control  over  Blue  Shield 
plans,  see  Bureau  of  Competition,  supra  note  60;  FTC,  Statement  of  Enforcement  Policy, 
46  Fed.  Reg.  48,982  (1981),  that  control  was  already  attenuated  by  the  time  the  FTC 
acted.  Blue  Cross  plans  had  gradually  withdrawn  from  direct  affiliation  with  state  hospital 
associations  somewhat  earlier.  It  is  most  unlikely  that  providers  would  have  released  the 
Blue  plans  from  their  direct  control  without  more  compulsion  if  they  had  not  anticipated 
that  once  independent,  the  plans,  as  nonprofit  corporations,  would  continue  to  pursue 
pro-provider  policies  in  their  own  self-interest.  See  infra  note  102. 

'"^Because  the  Blues,  as  nonprofit  corporations,  were  more  interested  in  maximizing 
their  gross  revenues  and  market  shares  than  in  maximizing  short-run  corporate  profits, 
there  was  a  solid  basis  for  an  enduring  and  mutually  advantageous  relationship  with 
providers.  Nonprofit  firms  have  somewhat  different  incentives  than  for-profit  firms.  Man- 
agers are  more  interested  in  increasing  their  market  shares  than  increasing  profits  because 
the  manager's  salary  and  prestige  is  more  closely  associated  with  firm  size  than  with 
profitability.  Freeh  &  Ginsburg,  Competition  Among  Health  Insurers,  in  Competition  in 
The  Health  Care  Sector:  Past,  Present  and  Future  175  (W.  Greenberg  ed.  1974). 
In  non-profit  firms,  such  as  Blue  Cross  and  Blue  Shield,  the  desire  for  growth  is  even 
stronger  because  there  are  no  profits  to  distribute  or  shareholders  to  object.  Id.  at  175, 
184. 


1018  INDIANA  LAW  REVIEW  [Vol.  19:989 

government-conferred  tax  and  other  benefits, ^^^  these  relationships  gave 
the  Blues  a  substantial  competitive  advantage  over  actual  and  potential 
competitors. 

The  pattern  of  Blue/provider  relationships  over  many  years  and  in 
many  markets  was  one  in  which  the  Blue  plan  and  the  dominant  or- 
ganization of  hospitals  or  physicians  each  used  its  own  market  position 
in  such  a  way  as  to  preserve  and  strengthen  the  market  position  of  the 
other.  Mutual  accommodation  was  assured  through  liaison  and  committee 
structures.  Most  importantly,  the  most  successful  Blue  Cross  plans  gen- 
erally enjoyed  large  discounts  from  the  hospitals, ^°^  and  Blue  Shield 
plans  almost  universally  received  comparable  concessions  from  "partic- 
ipating" physicians. '°^  Because  these  concessions  were  granted  by  prov- 
iders acting  in  concert  rather  than  extracted  by  the  Blues  in  competitive 
bidding, ^^^  they  left  providers  in  a  position  to  function  as  a  cartel  vis- 


'°^For  tax  purposes,  the  IRS  long  exempted  Blue  Cross  and  Blue  Shield  plans  as 
social  welfare  organizations.  See  I.R.C.  §  501(c)(4)  (1982).  In  the  Tax  Reform  Act  of 
1986,  however.  Congress  eliminated  the  tax  exemption  granted  to  Blue  Cross  and  Blue 
Shield  plans.  See  H.R.  3838,  99th  Cong.,  1st  Sess.  §1012  (1985).  Commercial  health 
insurers  and  other  proponents  of  this  reform  contended  that  special  tax  treatment  of  Blue 
Cross  and  Blue  Shield  plans  is  inappropriate  because  the  plans  employ  business  practices 
of  commercial  insurers  and  are  engaged  in  an  inherently  commercial  activity.  General 
Accounting  Office,  Health  Insurance:  Comparing  Blue  Cross  and  Blue  Shield  Plans 
w^iTH  Commercial  Insurers  8-10  (1986).  The  Blue  Cross  and  Blue  Shield  Association 
contended  that  the  exemption  is  warranted  because  the  exemption  permits  Blue  Cross  and 
Blue  Shield  plans  to  cross-subsidize  coverage  to  high-risk  individuals  and  small  groups. 
Id.  at  9. 

State  law  also  often  confers  valuable  advantages  on  Blue  plans  in  the  form  of 
exemptions  from  premium  taxes  and  special  privileges  with  regard  to  direct  contracting 
with  providers. 

'""Adamache  &  Sloan,  Competition  Between  Non-Prof  it  and  For-Profit  Health  In- 
surers, 2  J.  Health  Economics  225,  227-29,  240-41  (1983).  The  mean  relative  Blue  Cross 
discount  is  four  percent  and  ranges  as  high  as  27  percent.  Id.  at  229.  Large  discounts 
frequently  correspond  to  large  market  shares. 

A  commercial  insurer  unsuccessfully  challenged  a  typical  Blue  Cross  discount  in 
Travelers  Ins.  Co.  v.  Blue  Cross,  481  F.2d  80  (3d  Cir.  1973).  For  an  analysis  of  this 
case  pointing  out  its  relevance  to  this  discussion,  see  Havighurst,  supra  note  100. 

'°The  concessions  usually  take  the  form  of  acceptance  of  payments  under  the  UCR 
formula  as  payment  in  full.  See  supra  note  45.  See  generally  Bureau  of  Competition, 
supra  note  60  (describing  Blue  Shield  payment  arrangements  and  characterizing  them  as 
price  fixing  when  the  plan  is  under  physician  control).  For  a  case  in  which  physician 
organizations  offered  similar  collective  concessions  to  any  payer  that  obtained  the  orga- 
nizations' approval  (presumably  by  refraining  from  unfriendly  acts),  see  Arizona  v.  Mar- 
icopa County  Medical  Soc'y,  457  U.S.  332,  356-57  (1982)  (doctors'  agreement  on  maximum 
fees  held  unlawful  price  fixing  under  the  antitrust  laws). 

'°*See,  e.g..  Travelers  Ins.  Co.  v.  Blue  Cross,  481  F.2d  80,  84  (3d  Cir.  1973)  (discounts 
"negotiated  jointly"  by  hospital  association).  Restrictions  placed  by  physician  organizations 
on  individual  physicians  directly  contracting  with  unapproved  insurers  were  condemned  in 
American  Medical  Ass'n  v.  FTC,  638  F.2d  443  (2d  Cir.  1980),  affd  by  equally  divided 
Court,  455  U.S.  676  (1982);  see  also  Havighurst,  supra  note  62,  at  336-42. 


1986]  LITHOTRIPSY  1019 

a- vis  the  Blues'  competitors.  Although  most  Blue  plans  could  have 
obtained  larger  price  concessions  by  using  their  buying  power  to  destroy 
the  provider  cartel,  doing  business  with  it  usually  proved  more  advan- 
tageous, yielding  the  Blues  a  net  cost  advantage  over  their  competitors 
that  was  both  larger  and  more  permanent  than  they  could  have  enjoyed 
under  competition;  as  long  as  the  cartel  was  effective,  HMO's  and 
commercial  insurers  could  get  no  concessions  from  providers  at  all.^°^ 
Consumers  were  thus  unable  to  obtain  coverage  from  plans  that  purchased 
provider  services  on  truly  competitive  terms. ^°^  The  Blues'  greatest  com- 
mercial successes  were  therefore  gained,  not  by  efficient  operation  in  a 
competitive  market,  but  by  cultivating  provider  cartels  that  inflated  the 
costs  of  their  competitors.'^^ 

Organized  providers,  for  their  part,  were  generally  glad  to  cooperate 
with  and  even  to  subsidize  their  biggest  customer  as  long  as  it  adhered 
to  cartel-protective  policies  and  provided  insurance  coverage  in  forms 
that  obviated  provider  price  competition' '°  and  kept  demand  for  hospital 
and  physician  services  artificially  high.'''  Although  providers  complained 


'"^Until  very  recently,  non-Blue  payers  were  unable  to  bargain  with  providers  for 
price  discounts  or  concessions  of  any  kind.  For  a  full  discussion  of  provider-imposed 
restraints,  including  boycotts  of  plans  that  offended  providers,  see  Havighurst,  supra  note 
62,  at  336-42.  Many  commentators  are  noting  the  changing  character  of  today's  health 
care  market.  See,  e.g..  Managed  Care:  Will  It  Push  Providers  Against  the  Wall?,  Hospitals, 
Oct.  5,  1986,  at  66.  The  new  pressures  on  providers  to  grant  competitive  discounts  and 
to  accept  undesired  cost  controls  result  from  a  combination  of  circumstances,  including 
antitrust  enforcement  against  provider  cartel  behavior;  state  PPO  legislation  and  PPO 
development;  the  increased  cost-consciousness  and  aggressiveness  of  larger  purchasers; 
increased  competitiveness  on  the  supply  side  of  the  market  because  of  surpluses  of  both 
physicians  and  hospital  facilities;  government's  example  as  a  prudent  purchaser  of  services; 
and  realization  in  the  private  sector  that  government  is  not  likely,  as  it  threatened  to  do 
throughout  the  1970's,  to  regulate  private  health  care  costs.  Despite  widespread  observations 
of  intensified  competition,  however,  competition's  potential  has  not  yet  been  reahzed  in 
every  market,  and  indeed  has  probably  not  been  fully  realized  anywhere. 

'°^The  perception  that  consumers  freely  chose  Blue-style  coverage,  with  free  choice 
of  provider,  etc.,  in  preference  to  other  kinds  of  coverage  is  mistaken  because  alternative 
types  of  coverage  were  seldom  offered  with  price  tags  reflecting  the  full  cost  advantage 
obtainable  though  limitations  on  choice  and  competitive  purchasing.  See  infra  note  111. 

'"Tor  recent  scholarship  focusing  specifically  on  exclusion  of  rivals  by  raising  their 
costs,  see  Krattenmaker  &  Salop,  Anticompetitive  Exclusion:  Raising  Rivals'  Costs  to  Achieve 
Power  over  Price,  96  Yale  L.J.  209  (1986). 

""Hospital  cost  reimbursement,  payment  of  physicians  under  UCR  and  similar  for- 
mulas, limited  use  of  cost  sharing,  and  guaranteed  free  choice  of  providers  make  consumers 
largely  indifferent  to  price  considerations,  thus  freeing  providers  to  compete  in  other,  cost- 
increasing  ways. 

'"The  Blues  have  systematically  offered  broader  coverage  than  other  insurers.  This 
coverage  benefits  providers  by  giving  broad  scope  to  "moral  hazard" — that  is,  insurance- 
induced  demand  and  insensitivity  to  price.  It  has  been  hypothesized  that  the  Blues  squander 
much  of  their  cost  advantage  over  other  carriers  by  writing  coverage  in  forms  most 
advantageous  to  providers.  Freeh  &  Ginsburg,  Competition  Among  Health  Insurers,  in 


1020  INDIANA  LAW  REVIEW  [Vol.  19:989 

from  time  to  time  about  a  Blue  plan's  practices,  such  complaints  were 
usually  not  inconsistent  with  the  existence  of  powerful  Blue/provider 
alhances.^^^  Even  when  a  major  confrontation  occurred  between  a  dom- 
inant provider  organization  and  a  Blue  plan,  the  triggering  event  was 
usually  a  minor  matter,  hardly  a  sign  that  the  plan  had  gone  over  entirely 
to  the  consumer's  side.^^^  Indeed,  the  Blue  plan's  disputed  policy  was 
usually  inspired,  not  by  the  plan's  own  corporate  initiative,  but  by  the 
irresistible  demand  of  a  state  insurance  commissioner""*  or  major  cus- 
tomer."^ For  many  years,  virtually  all  cost-containment  initiatives  by 
Blue  Cross  and  Blue  Shield  plans  that  were  not  exogenously  compelled 
were  carefully  negotiated  with  the  affected  provider  interests  before  being 
announced  as  a  Blue  victory  on  the  consumer's  behalf. 

The  action  of  NCBCBS  in  tying  its  own  hands  in  the  fight  to  get 
ESWL  services  for  North  Carolina  consumers  at  competitive  prices  was 
therefore  not  atypical.  Most  Blue  Cross  or  Blue  Shield  plans  have  similarly 
maintained  payment  systems  that  weaken  consumers'  incentive  to  econ- 
omize while  simultaneously  eschewing  the  role  of  an  aggressive  purchasing 
agent  procuring  providers'  services  for  consumers  at  competitive  prices. 


Competition  in  the  Health  Care  Sector:  Past,  Present,  and  Future  210,  216-19 
(1978).  This  insurance  is  overbroad  (inefficient)  in  the  sense  that  few  consumers  would 
buy  it  if  its  added  costs,  instead  of  being  subsidized  by  providers,  were  reflected  in  its 
price  relative  to  alternative  coverage.  The  result  of  inefficient  insurance  is  an  overallocation 
of  societal  resources  to  health  care. 

"^One  should  not  attach  undue  significance  to  complaints  about  NCBCBS  practices 
that  emanate  from  provider  camps;  within  any  conspiracy  in  restraint  of  trade,  there  are 
always  differences  of  opinion,  sometimes  serious  ones,  over  the  best  collective  strategy. 
Thus,  complaints  and  even  lawsuits  challenging  plan  practices  by  individual  providers  are 
to  be  expected  even  if  the  Blue  plan  is  faithfully  serving  cartel  interests.  Conceivably, 
even  such  striking  cases  as  Kartell  v.  Blue  Shield,  749  F.2d  922  (1st  Cir.  1984)  (unsuccessful 
challenge  to  a  plan's  alleged  monopsonistic  exploitation  of  physicians),  cert,  denied,  105 
S.  Ct.  2040  (1985),  and  Ball  Memorial  Hosp.  v.  Mutual  Hosp.  Ins.,  Inc.,  784  F.2d  1325 
(7th  Cir.  1986)  (unsuccessful  challenge  to  a  Blue  Cross-sponsored  PPO  as  an  exercise  of 
monopsony  power  against  hospitals),  may  involve  only  a  difference  of  opinion  concerning 
the  best  strategy  for  pricing  provider  services  under  emerging  market  conditions  rather 
than  the  Blue  plan's  permanent  defection  from  the  old  alliance.  But  see  sources  cited  in 
note  117  infra. 

"'In  In  re  Michigan  State  Medical  Soc'y,  101  F.T.C.  191  (1983),  a  state  medical 
society  threatened  a  Blue  plan  with  a  statewide  physician  boycott  because  the  plan  attempted 
to  control  the  cost  of  vision  and  hearing  care.  The  medical  society's  vigorous  and  seemingly 
disproportionate  reaction  was  prompted,  not  by  the  particular  initiative  itself,  but  by  the 
Blue  plan's  unprecedented  departure  from  the  principle  of  free  choice  of  physician.  Id. 
at  216-21. 

"^In  Kartell  v.  Blue  Shield,  749  F.2d  922  (1st  Cir.  1984),  cert,  denied,  105  S.  Ct. 
2040  (1985),  the  plan's  refusal  to  allow  balance  bilhng  was  in  part  a  function  of  state 
legislation  and  regulation. 

"^In  Michigan  State  Medical  Society,  the  initiative  of  Michigan  Blue  Cross  and  Blue 
Shield  that  was  so  offensive  to  physicians  was  dictated  by  the  auto  companies  and  the 
United  Auto  Workers.  101  F.T.C.  at  216-21. 


1986]  LITHOTRIPSY  1021 

Although  there  have  recently  been  some  impressive  departures  by  Blue 
plans  from  such  pro-provider  practices, ^^^  these  defections  have  almost 
always  occurred  only  because  other  prepayment  mechanisms,  primarily 
HMO's  and  PPO's,  had  already  breached  the  defenses  of  the  hospital 
and  doctor  cartels  in  the  particular  market.  Facing  price  competition 
from  efficient  purchasers  for  the  first  time,  the  Blues  had  little  choice 
but  to  abandon  their  old  strategy  and  turn  on  their  old  allies. '^^  Despite 
these  notable  breakdowns  of  Blue/provider  collaboration,  it  is  far  from 
clear  that  competition  is  yet  so  intense  and  uninhibited  in  many  health 
care  markets  that  Blue/provider  alliances  are  no  longer  effective  or  worth 
worrying  about.  Although  the  coming  of  competition  has  generated  a 
great  deal  of  discussion  and  consternation,  its  effects  are  still  hard  to 
detect  in  anything  but  anecdotes.''^  Most  Blue  Cross  and  Blue  Shield 
plans  have  not  yet  definitively  changed  sides  in  the  contest  between 
consumers  and  providers. 

There  are  few  signs  that  competition  has  yet  made  enough  headway 
in  North  Carolina  markets  to  force  NCBCBS  to  enter  the  fray  on  the 
consumer's  side.  Most  NCBCBS  contracts  still  embody  free  choice  of 
provider,  cost  reimbursement  for  hospitals,  UCR  fee  limits  for  physician 
services,  and  limited  cost  sharing,  indicating  that  the  plan  has  yet  to 
break  significantly  with  its  tradition  of  catering  to  providers'  essential 
interests.  Although  NCBCBS  has  introduced  such  innovations  as  HMO 
and  PPO  arrangements  of  its  own,''^  these  mechanisms  do  not  yet  face 
enough  competition  from  independent  health  plans  to  induce  them  to 
bargain  with  providers  as  adversaries  rather  than  as  allies. '^^  Indeed, 

"^See,  e.g.,  Greenberg,  supra  note  100. 

"'5ee  supra  note  111;  infra  note  126.  The  precise  inspiration  for  the  Blue  initiatives 
challenged  in  Kartell,  749  F.2d  922,  and  Ball  Memorial,  784  F.2d  1325,  is  difficult  to 
determine,  but  it  is  probable  that  these  were  competition-inspired  departures  from  the 
Blues'  historic  policy  of  cooperating  with  provider  interests.  But  see  supra  notes  112  & 
114.  If  so,  they  should  be  regarded  as  exceptions  that  prove  the  rule.  Why,  for  example, 
did  such  cases  not  appear  much  earlier? 

"^See  supra  note  107. 

'"Blue  Cross's  Personal  Care  Plan  of  North  Carolina,  Inc.  (PCP)  is  an  HMO  of 
the  individual  practice  association  variety.  In  addition,  Blue  Cross  has  transferred  some 
standard  HMO  contracts  to  PCP.  As  of  April  1986,  PCP  had  21,000  enrollees,  and  it 
subsequently  added  73,784  state  employees.  N.C.  Dep't  of  Insurance,  Health  Main- 
tenance Organizations:  Status  in  North  Carolina  (April  1986  &  Supp.  July  3,  1986). 
Although  NCBCBS  officials  claim  that  such  recent  innovations  as  a  preadmission  certification 
program,  PPO  and  HMO  arrangements,  the  participating  physician  program,  and  a  program 
to  encourage  ambulatory  surgery  are  evidence  of  their  willingness  to  challenge  providers, 
the  text  gives  reasons  for  disputing  this  claim. 

'^"Enrollment  in  active  alternative  health  plans  in  North  Carolina  totalled  134,791  in 
April  1986,  with  78,913  state  employees  added  subsequently,  for  a  total  of  213,704.  Id. 
Of  these  subscribers.  Blue  Cross's  PCP  enrolled  94,784.  Several  of  the  remaining  plans 
were  sponsored  by  dominant  physician  interests.  Thus,  the  only  truly  independent  plans 
able  and  philosophically  willing  to  purchase  physician  services  on  a  competitive  basis  were 
Health  America,  Kaiser,  and  PruCare,  which  enrolled  43,116,  23,366,  and  11,877  sub- 
scribers, respectively  (out  of  a  state  population  of  5.9  million).  Id. 


1022  INDIANA  LAW  REVIEW  [Vol.  19:989 

these  mechanisms  may  serve  primarily  as  '* fighting  ships,"  weapons  that 
allow  NCBCBS  and  their  provider  alHes  to  repel  or  discipline  independent 
plans  that  seek  to  enter  the  market  and  to  force  providers  into  unwanted 
competition.*^'  If  so,  the  alliance's  newly  forged  strategic  capacity  to 
slash  prices  to  meet  a  competitive  threat  is  more  an  impediment  to  than 
a  manifestation  of  the  emergence  of  effective  competition  in  the  state. 
Certainly  NCBCBS' s  inability  to  control  the  price  and  cost  of  lithotripsy 
in  North  Carolina  suggests  that  the  old  alliance  is  still  very  much  intact. 

B.     Revising  the  Rules— "On  Your  Mark,  Get  Set,  Go!*' 

If  ESWL  costs  in  North  Carohna  should  rise  in  the  aftermath  of 
the  repeal  of  CON  requirements  for  lithotripters,  the  natural  impulse 
will  be  to  blame  the  legislature  for  deregulating  this  new  technology. 
Nevertheless,  because  the  true  source  of  the  problem  lies  in  antiquated, 
pro-provider  payment  mechanisms,  it  can  be  argued  that  the  legislature's 
greater  failure  was  in  deciding  to  deregulate  only  lithotripsy.  Because 
payments  for  lithotripsy  are  only  a  very  small  percentage  of  insurers' 
overall  payments  for  health  care  services,  the  threat  of  higher  costs  for 
this  one  service  is  unlikely  to  trigger  the  fundamental  changes  in  financing 
arrangements  that  are  needed  if  costs  are  to  be  brought  under  effective 
control  by  market  forces.  Across-the-board  deregulation,  however,  would 
be  such  a  dramatic  change  in  the  rules  that  all  players  on  the  demand 
side  of  the  market,  particularly  NCBCBS  and  its  customers,  would  have 
little  choice  but  to  reexamine  their  game  plans.  The  sudden  need  of 
consumers  and  major  purchasers  of  health  insurance  to  find  better  allies 
in  the  cost-containment  effort  would  bring  about  a  competitive  rush  to 
find  new  defenses  against  provider  overcharging,  overspending,  and  ov- 
erinvestment. 

The  main  policy  reason  why  most  states  are  continuing  CON  reg- 
ulation today,  after  the  theoretical  argument  for  it  has  been  largely 
disproved, '^^  is  their  belief  that  their  local  health  care  markets  are  not 


'^'A  prepayment  plan  controlled  by  dominant  provider  interests  presents  the  same 
hazard  to  competition  that  is  presented  by  an  informal  Blue/provider  alUance.  On  the 
antitrust  and  policy  implications  of  prepayment  plans  controlled  by  dominant  provider 
organizations,  see  FTC,  supra  note  101;  Havighurst  &  Hackbarth,  Enforcing  the  Rules 
of  Free  Enterprise  in  an  Imperfect  Market:  The  Case  of  Individual  Practice  Associations, 
in  A  New  Approach  to  the  Economics  of  Health  Care  377  (M.  Olson  ed.  198  ).  For 
evidence  of  how  a  financing  plan  and  a  provider  cartel,  operating  together,  can  exclude 
or  discipline  other  payers,  see  Goldberg  &  Greenberg,  The  Effect  of  Physician-Controlled 
Health  Insurance:  United  States  v.  Oregon  State  Medical  Society,  2  J.  Health  Pol.  Pol'y 
&  L.  48  (1977).  Because  the  same  problems  could  also  arise  where  the  Blue/provider 
alliance  was  of  the  informal  variety,  Blue  Cross's  PCP  may  be  more  anticompetitive  than 
procompetitive. 

'^^The  theory  of  CON  regulation  was  that  payment  systems  inevitably  and  inefficiently 
distort  spending.  See  references  cited  supra  note  12.  Changes  in  purchasing  practices  can 


1986]  LITHOTRIPSY  1023 

yet  sufficiently  competitive  to  entrust  them  with  the  task  of  allocating 
resources  and  discouraging  overinvestment. ^^^  Many  states,  however,  are 
moving  toward  deregulation  in  small  increments  by  raising  the  capital 
investment  thresholds  of  CON  requirements  and  exempting  additional 
categories  of  providers  and  investments. ^^"^  Although  these  steps  may 
seem  desirable  in  the  general  sense  that  they  get  government  off  providers' 
backs,  deregulation  is  more  likely  to  represent  a  pro-consumer  change 
in  the  rules  of  the  game  if  it  is  done  on  a  wholesale  rather  than  a 
piecemeal  basis. '^^  Only  then  would  the  legislature's  move  constitute  a 
clear  message  to  players  who  purchase  and  players  who  sell  obsolete 
forms  of  health  insurance  that  they  can  expect  to  be  losers  in  future 
competition  unless  they  change  their  strategies  in  fundamental  ways. 
Only  if  that  message  is  sent,  received,  and  acted  upon  will  consumers 
be  in  a  position  to  hold  their  own  in  struggles  over  the  uses  of  medical 
technology,  old  and  new.  A  totally  deregulated  market  is  most  likely 
to  generate  the  radical  rethinking  and  restructuring  that  is  needed  to 
force  NCBCBS  and  other  Blue  Cross  and  Blue  Shield  plans  finally  to 
break  with  their  provider  allies  and  to  use  their  bargaining  power  on 
the  consumer's  behalf. '^^ 

Because  introducing  meaningful  change  in  health  care  financing  mech- 
anisms seems  to  be  a  slow  and  difficult  process  requiring  the  reeducation 
of  many  players  and  the  devising  of  intricate  new  strategies,  the  best 
policy  option  available  to  North  Carolina  and  other  states  is  probably 
to  announce  the  expiration  of  their  CON  laws  as  of  some  fixed  future 


offset  many  of  these  distortions,  however,  and  those  that  remain  should  be  regarded  as 
a  cost  of  having  insurance,  not  as  inefficiency.  See  supra  text  accompanying  notes  83- 
94;  P.  JosKOW,  supra  note  12,  at  21-31. 

'^^An  alternative  justification  for  CON  regulation  of  hospitals  and  their  competitors 
is  the  alleged  necessity  to  preserve  cross-subsidization  of  indigent  care,  education,  and 
research.  Curbing  competition  enables  hospitals  to  overcharge  some  patients  and  thereby 
to  generate  revenues  to  fund  these  worthy  purposes.  For  arguments  against  using  regulation 
for  this  purpose,  see  e.g.,  Havighurst,  The  Debate  Over  Health  Care  Cost-Containment 
Regulation:  The  Issues  and  the  Interests,  in  Incentives  Versus  Controls  in  Health  Policy 
9  (J.  Meyer  ed.  1985).  The  case  for  controlling  nursing  home  investments  is  unique  to 
that  industry,  because  of  its  heavy  involvement  with  the  Medicaid  program,  and  is  not 
considered  here.  See  C.  Havighurst,  supra  note  13,  at  353-63. 

^^See  Simpson,  supra  note  37. 

^^^See  discussion  of  a  "market-forcing"  regulatory  strategy  in  C.  Havighurst,  supra 
note  13,  at  321-44. 

i26Xhere  is  a  degree  of  irony  in  unleashing  the  market  power  of  the  Blue  plans,  which 
were  created  to  serve  providers  and  which  served  their  interests  so  well  for  so  long,  against 
their  original  sponsors.  See  Ball  Memorial,  784  F.2d  1325;  Kartell,  749  F.2d  922,  discussed 
supra  notes  112  and  117.  But  there  is  a  potential  paradox  as  well.  Where  a  Blue  plan 
possesses  market  power,  it  might  be  vulnerable  to  attack  under  section  2  of  the  Sherman 
Act  because  of  exclusionary  practices  of  the  type  noted  supra  text  accompanying  notes 
100-09.  But  to  raise  such  a  challenge,  providers  would  have  to  claim  that  a  Blue  plan 
unlawfully  monopoUzed  the  market  by  fostering  the  providers'  own  cartel. 


1024  INDIANA  LAW  REVIEW  [Vol.  19:989 

date.  The  setting  of  such  a  sunset  date  should  be  done  in  a  way  that 
clearly  warns  purchasers  and  providers  of  health  insurance  of  the  need 
to  find  alternative  means  of  cost  containment,  while  providing  them 
time  to  change  their  allegiances  and  to  consider  and  install  the  defenses 
they  prefer. '^^  Such  a  legislative  move,  if  accompanied  by  efforts  to  free 
the  local  market  of  legal  and  other  restrictions  on  innovation,  would 
materially  improve  the  chances  for  a  consumer  victory  not  only  in  the 
lithotripsy  game  but  also  in  the  larger  battle  against  wasteful  health  care 
spending. 


'^^The  object  would  be  to  avoid  problems  similar  to  those  allegedly  encountered  in 
Arizona  and  Utah  when  CON  was  repealed.  See  supra  note  97.  In  particular,  the  federal 
government  itself  needs  more  time  to  change  its  current  approach  to  reimbursing  capital 
costs,  which  still  invites  excessive  investment.  See  supra  note  78. 


Full  Circle:  The  Return  of  Certificate  of  Need  Regulation 
of  Health  Facilities  to  State  Control* 


James  B.  Simpson** 

''Each  certificate  of  need  proceeding  is  an  exercise  in  the  inherently 
inexact  science  of  determining  how  society's  scarce  health  care  resources 
might  best  be  allocated.''^ 

I.     Introduction 

Certificate  of  need  (CON)  programs  are  federally-funded,  state-ad- 
ministered regulatory  mechanisms  providing  for  review  and  approval  by 
health  planning  agencies  of  capital  expenditures  and  service  capacity 
expansion  by  hospitals  and  other  health  care  facilities.  Their  primary 
purpose  is  to  discourage  unnecessary  investment  in  health  care  facilities 
and  to  channel  investment  into  socially  desirable  uses.  At  the  beginning 
of  1986,  forty-two  states  and  the  District  of  Columbia  had  statutes 
authorizing  such  programs,  and  four  of  the  eight  states  without  certificate 
of  need  statutes  operated  similar  programs  authorized  under  the  Social 
Security  Act.^  A  majority  of  states  have  administered  such  programs 
for  over  a  decade. 

State  certificate  of  need  programs  generally  operate  in  the  following 
manner.  A  health  care  facility  covered  by  the  program  must  submit  a 
permit  application  to  an  official  state  health  planning  agency  before 
undertaking  those  capital  expenditures  and  other  projects  subject  to 
review.  The  average  proposed  expenditure  is  $1.7  million,  and  states 
review  an  average  of  127  applications  each  year.^  The  state  agency 
transfers  the  application  for  initial  review  to  a  local  health  planning 
organization,  comprised  of  consumers  and  medical  care  providers  in  the 


*This  article  has  been  funded  by  the  Health  Resources  Administration,  Department 
of  Health  and  Human  Services,  under  contract  HRA  232-79-0037.  The  contents  of  the 
article  do  not  necessarily  reflect  the  view  or  policies  of  the  Department  of  Health  and 
Human  Services,  nor  does  mention  of  trade  names,  commercial  products,  or  organizations 
imply  endorsement  by  the  U.S.  Government. 

**Director,  Legal  Resources  Program,  Western  Consortium  for  Public  Health,  San 
Francisco,  Cal.  B.A.,  Lawrence  University,  1972;  M.P.H.,  University  of  California,  Los 
Angeles,   1974;  J.D.,  University  of  California,  Berkeley  (Boalt  Hall),   1978. 

'Kansas  Dep't  of  Health  &  Env't  v.  Banks,  230  Kan.  169,  170-71,  630  P.2d  1131, 
1133  (1981). 

'State  laws  relating  to  health  planning  and  certificate  of  need  are  frequently  amended. 
Except  as  otherwise  indicated,  the  information  on  state  certificate  of  need  programs 
presented  in  this  article  is  current  as  of  January  1,   1986. 

^Office  of  Health  Planning,  U.S.  Dep't  of  Health  «&  Human  Services,  Status 
Report  on  State  Certificate  of  Need  Programs  9-10  (1985). 

1025 


1026  INDIANA  LAW  REVIEW  [Vol.  19:1025 

community  to  be  served  by  the  proposed  project.  Review  criteria  include 
consideration  of  community  need,  financial  feasibility,  expected  quality 
of  care,  less  costly  alternatives,  and  accessibility  of  the  project  to  un- 
derserved  and  indigent  populations.  The  local  organization  conducts  a 
public  meeting  at  which  interested  persons  may  comment  on  the  proposal. 
It  then  conveys  its  recommendation  to  approve  or  deny  the  project  to 
the  state  health  planning  agency.  The  state  agency  conducts  an  admin- 
istrative adjudicatory  hearing  on  the  application  and  renders  a  formal 
decision  as  to  the  need  for  the  project.  Administrative  and  judicial 
appeals  may  follow,  and  often  do  when  multiple  applicants  compete  to 
serve  an  identified  community  need.  The  ultimately  successful  applicant 
is  awarded  a  "certificate  of  need"  entitling  it  to  proceed  with  its  project. 

A.     Federal  Involvement 

Over  the  years,  federal  control  over  state  health  planning  and  cer- 
tificates of  need  has  waxed  and  waned.  In  the  late  1960's,  the  federal 
government  financed  voluntary,  non-regulatory  health  service  planning 
programs  at  the  local  community  and  state  levels.  In  1972,  Congress 
adopted  section  1122  of  the  Social  Security  Act,  providing  for  review, 
by  states  choosing  to  participate,  of  proposed  capital  expenditures  by 
health  care  facilities  reimbursed  under  Medicare  and  Medicaid. "•  Most 
states  have  participated  in  section  1122  at  some  time.^  In  1975,  Congress 
passed  the  National  Health  Planning  and  Resources  Development  Act 
of  1974'  (NHPRDA  or  Act).  The  Act  provided  substantial  funding  for 
state  and  local  health  planning  activities  and  effectively  required  states 
to  adopt  certificate  of  need  laws  conforming  to  federal  standards. 

After  the  passage  of  NHPRDA,  states  without  certificate  of  need 
began  to  adopt  statutes  complying  with  the  Act.  States  with  pre-existing 
statutes  took  steps  to  comply  with  the  federal  requirements,  which 
mandated  a  certificate  of  need  program  of  extremely  broad  regulatory 
scope,  subjecting  a  wide  range  of  health  care  facilities  and  projects  to 
a  complex  review  and  approval  process.  In  a  few  years  most  states  had 
programs  resembling  the  federal  model. ^ 

With  the  advent  of  the  Reagan  administration  in  1980,  federal  support 
for  certificate  of  need  fell  on  hard  times.  The  administration  entered 
office  with  an  anti-regulatory  platform  and  a  strong  interest  in  using 


"Social  Security  Amendments  of  1972,  §  221(a),  86  Stat.  1386  (codified  as  amended 
at  42  U.S.C.  §  1320a-l  (1982  &  Supp.  I  1983)). 

^See  infra  note  73  and  accompanying  text. 

*Pub.  L.  No.  93-641,  88  Stat.  2225  (1975)  (codified  as  amended  at  42  U.S.C. 
§§  300k-300n-6  (1982)). 

^See  Cohodes,  The  State  Experience  with  Capital  Management  and  Capital  Ex- 
penditure Review  Programs,  in  Bureau  of  Health  Facilities,  U.S.  Dep't  of  Health  & 
Human  Services,  Health  Capital  Issues  87-88  (DHHS  Pub.  No.  (HRA)  81-14531  (1980)). 


1986]  CERTIFICATE  OF  NEED  1027 

market  incentives  rather  than  regulatory  controls  to  restrain  the  rising 
costs  of  health  programs.  It  proposed  to  delete  funding  under  NHPRDA, 
and  although  Congress  did  not  fully  concur,  funding  for  health  planning 
dropped  sharply.*  At  the  same  time,  however,  the  prescriptive  terms 
under  which  the  federal  government  awarded  monies  to  states  for  cer- 
tificate of  need  programs  were  greatly  relaxed.^ 

Consequently,  state  certificate  of  need  programs  have  begun  to 
diverge  from  the  federal  model  and  from  each  other.  Some  states  have 
entirely  repealed  their  certificate  of  need  laws.'^  Others  have  increased 
the  scope  and  forcefulness  of  their  regulatory  controls."  The  vast  majority 
of  states  have  modified  their  programs  in  recent  years  by  streamlining 
the  review  process  and  narrowing  the  range  of  health  care  facilities  and 
projects  subject  to  review.  In  doing  so,  they  appear  to  have  shifted  the 
goals  of  their  certificate  of  need  programs  from  systematic  management 
of  all  institutional  health  care  delivery  to  several  more  narrowly  conceived 
purposes. 

This  Article  describes  changes  in  state  certificate  of  need  programs 
from  their  origins  to  the  present.  It  concentrates  on  the  types  of  health 
care  facilities  and  categories  of  projects  that  have  been  subject  to  cer- 
tificate of  need  review,  because  scope  of  coverage  is  the  aspect  of 
certificate  of  need  that  has  changed  the  most  over  the  years  in  response 
to  changing  state  and  federal  regulatory  policies. 

A  number  of  recent  studies  have  considered  procedural  aspects  of 
state  certificate  of  need  programs.''  Several  have  attempted  to  evaluate 
the  impact  of  such  programs  on  health  care  expenditures.'-*  Evaluations 

'In  fiscal  year  1982,  annual  NHPRDA  funding  was  reduced  by  one  half  to  $64.4 
million.  H.R.  Rep.  No.  218,  98th  Cong.,  1st  Sess.  10  (1983).  It  has  remained  at  that 
level  ever  since. 

^See  infra  note  166  and  accompanying  text. 

^°See  infra  Table  1  and  text  accompanying  note  192. 

"See  infra  Table  2;  noets  194-245  and  accompanying  text. 

'^Brown,  Common  Sense  Meets  Implementation:  Certificate  of  Need  Regulation  in 
the  States,  8  J.  Health  Pol.  Pol'y  &  L.  480  (1983);  Cohodes,  supra  note  7,  at  68; 
Consedine,  Jekel,  &  Dunaye,  Certificate  of  Need  and  the  Pitfalls  of  Due  Process,  17 
Inquiry  348  (1980);  Nutt  &  Hurley,  Factors  That  Influence  Capital  Expenditure  Review 
Decisions,  18  Inquiry  151  (19S\),  see.  e.g.,  Colby  &  Begley,  The  Effects  of  Implementation 
Problems  on  Certificate  of  Need  Decisions  in  Illinois,  3  Health  Pol'y  Educ.  303  (1983). 

'■E.g.,  Ash  by.  The  Impact  of  Hospital  Regulatory  Programs  on  Per  Capita  Costs, 
Utilization,  and  Capital  Investment,  21  Inquiry  45  (1984);  Howell,  Evaluating  the  Impact 
of  Certificate  of  Need  Regulation  Using  Measures  of  Ultimate  Outcome:  Some  Cautions 
from  Experience  in  Massachusetts,  19  Health  Services  Reg.  587  (1984);  Joskow,  The 
Effects  of  Competition  and  Regulation  on  Hospital  Bed  Supply  and  the  Reservation  Quality 
of  the  Hospital,  11  Bell  J.  Econ.  421  (1980);  Sloan,  Rate  Regulation  as  a  Strategy  for 
Hospital  Cost  Control:  Evidence  for  the  Last  Decade,  61  Milbank  Mem.  Fund  Q.  195 
(1983);  Sloan  &  Steinwald,  Effects  of  Regulation  on  Hospital  Costs  and  Input  Use,  23 
J.  Law  &  EcoN.  81  (1980).  A  survey  and  critique  of  other,  unpublished  studies  may  be 
found  in  Congressional  Budget  Office,  Health  Planning:  Issues  for  Reauthorization 
19-30,  57-64  (1982). 


1028  INDIANA  LAW  REVIEW  [Vol.  19:1025 

of  the  regulatory  "toughness"  of  state  certificate  of  need  programs  and 
variations  in  performance  have  also  been  undertaken."*  However,  there 
have  been  no  recent  reports  examining  in  detail  project  coverage  under 
certificate  of  need  programs.'^ 

II.     Purposes  of  Certificate  of  Need 

States  undertake  certificate  of  need  programs  to  achieve  various 
goals,  which  may  differ  from  state  to  state  and  from  one  type  of  covered 
project  to  another.  The  major  premise  underlying  certificate  of  need  is 
that  the  market  for  institutional  health  services  contains  incentives  to 
excess  capital  investment  for  which  certificate  of  need  programs  are 
intended  to  compensate  by  limiting  entry  to  facilities  and  services  found 
to  be  medically  necessary  and  affordable.'^  Every  state  certificate  of  need 


^*E.g.,  Policy  Analysis,  Inc.  and  Urban  Systems  Research  &  Engineering,  Inc., 
Evaluation  of  the  Effects  of  Certificate  of  Need  Programs  -  A  Report  on  Twelve 
State  C/N  Programs  (1981)  (Report  prepared  for  Health  Resources  Administration,  U.S. 
Dep't  of  Health  &  Human  Services  under  Contract  No.  231-77-0114);  Begley,  Schoeman 
&  Traxler,  Factors  That  May  Explain  Interstate  Differences  in  Certificate-of-Need  Decisions, 
1982  Health  Care  Fin.  Rev.  87. 

'■Surveys  comparing  certificate  of  need  expenditure  thresholds  are  distributed  from 
time  to  time.  E.g.,  Division  of  Regulatory  Activities,  Office  of  Health  Planning, 
U.S.  Dep't  of  Health  &  Human  Services,  Status  Report  on  State  Certificate  of 
Need  Programs  (1985),  distributed  in  Office  of  Health  Planning,  U.S.  Dep't  of  Health 
&  Human  Services,  Program  Information  Letter  85-34  (1985)  (expenditure  thresholds 
as  of  July,  1984);  Congressional  Budget  Office,  Health  Planning:  Issues  for  Reau- 
thorization (1982)  (expenditure  thresholds  as  of  March,  1982).  However,  published  reports 
identifying  health  care  facilities  and  types  of  projects  subject  to  certificate  of  need  review 
date  back  several  years.  See  Chayet  &  Sonnenreich,  P.C,  Certificate  of  Need:  An 
Expanding  Regulatory  Concept  5  (1978)  (survey  of  certificate  of  need  and  section  1122 
coverage  through  approximately  January,  1978);  Cohodes,  supra  note  7  (survey  of  certificate 
of  need  coverage  as  of  October,  1978);  Curran,  A  National  Survey  and  Analysis  of  State 
Certificate-of-Need  Laws  for  Health  Facilities,  in  Regulating  Health  Facilities  Con- 
struction 88-89  (1974)  (CON  coverage  as  of  the  end  of  1972  state  legislative  sessions); 
Havighurst,  Regulation  of  Health  Facilities  and  Services  by  "Certificate  of  Need, "  59 
Va.  L.  Rev.   1143  (1973)  (CON  coverage  as  of  1973). 

""Proponents  of  certificate  of  need  programs  cite  several  reasons  for  market  failure 
in  institutional  health  care.  See,  e.g.,  42  U.S.C.  §  300k-2  (1982)  (market  failure  rationale 
for  implementation  of  NHPRDA  certificate  of  need  function).  First,  such  care  is  covered 
by  private  insurance  or  governmental  benefit  programs  for  most  consumers,  making  them 
indifferent  to  the  choice  between  treatments  of  differing  costs  and  equal  benefit,  and  in 
favor  of  all  treatments  with  any  marginal  benefit,  regardless  of  cost.  Second,  federal  and 
state  tax  subsidies  encourage  individual  consumers  and  employees,  when  bargaining  col- 
lectively, to  purchase  more  health  insurance  than  they  otherwise  would,  exacerbating  the 
"moral  hazard"  of  insurance  coverage.  Third,  the  prevailing  methods  by  which  insurers 
and  government  benefit  programs  pay  for  institutional  health  services  discourage  attention 
to  costs  and  price  competition  by  providers.  Fourth,  medical  care  delivery  is  organized 
in  a  manner  that  tends  to  allocate  and  expend  resources  without  regard  to  cost.  Hospitals, 
in  particular,  are  organized  so  that  a  physician,  acting  as  an  insured  patient's  agent  and 


1986]  CERTIFICATE  OF  NEED  1029 

program  implicitly  incorporates  this  idea  by  providing  for  issuance  of 
certificates  on  the  basis  of  community  '*need."  Some  also  contain  express 
findings  of  market  failure  or  of  excess  capacity  in  the  health  sector.'^ 
The  second  major  rationale  for  certificate  of  need  is  to  protect  public 
health  by  preserving  and  improving  the  quality  of  institutional  health 
care.  Many  state  certificate  of  need  statutes  include  the  preservation  of 
quality  of  care  as  an  express  justification  for  their  adoption.'*^  In  addition, 
quality  of  care  considerations  appear  in  many  states'  certificate  of  need 
review  criteria  as  factors  to  be  taken  into  account  in  approving  or 
denying  applications.  For  example,  eight  state  certificate  of  need  statutes 
expressly  identify  quality  of  care  in  existing  facilities  (either  those  of 
the  applicant  or  other  health  care  providers)  as  a  review  criterion.'*^  Six 
certificate  of  need  statutes  explicitly  require  consideration  of  the  expected 


lacking  an  independent  incentive  to  limit  volume  or  costliness  of  care,  decides  what  services 
the  patient  receives.  Fifth,  there  has  traditionally  been  little  competition  among  health 
insurance  companies  of  the  sort  that  would  lead  them  to  bargain  with  institutional  health 
care  providers  over  price  and  volume  controls. 

The  foregoing  characteristics  cause  institutional  health  care  to  exhibit  excess  demand 
for  and  consumption  of  medical  technologies,  high  rates  of  introduction  of  new  technologies 
and  low  rates  of  introduction  of  cost-reducing  innovations,  duplication  of  facilities  and  ser- 
vices with  consequent  unused  capacity  and  failure  to  exploit  economies  of  scale,  and  general 
organizational  slack  and  inefficiency.  Certificate  of  need  programs  are  intended  to  prevent 
facility  duplication  and  excessive  rates  of  introduction  of  new  technologies  and  services. 
They  are  not  targeted  at  the  underlying  causes  of  market  failure,  nor  are  they  designed 
to  affect  directly  the  demand  for  existing  services  or  to  improve  efficiency  and  reduce  operating 
costs  in  health  care  facilities.  See  generally  P.  Joskow,  Controlling  Hospital  Costs:  The 
Role  of  Government  Regulation  56-88  (1981). 

''E.g.,  Colo.  Rev.  Stat.  §  25-3-502  (1982);  Fla.  Stat.  Ann.  §  381.493(2)  (Supp. 
1985);  III.  Ann.  Stat.  ch.  111-1/2  1  1152  (Smith-Hurd  Supp.  1985);  Ky.  Rev.  Stat. 
§  216B.010  (Supp.  1982);  Neb.  Rev.  Stat.  §  71-5802  (Supp.  1984);  N.H.  Rev.  Stat.  Ann. 
§  151-c:l  (Supp.  1983);  N.C.  Gen.  Stat.  §  131E-175  (Supp.  1983);  Or.  Rev.  Stat. 
§  442.025(2)  (Supp.  1983);  Pa.  Cons.  Stat.  Ann.  §  448.102  (Purdon  Supp.  1985);  S.D. 
Codified  Laws  Ann.  §  34-7A-22  (Supp.  1985);  Vt.  Stat.  Ann.  tit.  18,  §  2400  (1983); 
Wash.  Rev.  Code  Ann.  §  70-38-015  (Supp.  1986);  W.  Va.  Code  §§  16-2D-5(c),  (d)  (1985). 

''See,  e.g.,  Colo.  Rev.  Stat.  §  25-3-502(4)(a)  (1982);  1977  Hawaii  Sess.  Laws  Ch. 
178,  §  1  (1977);  Ky.  Rev.  Stat.  §  216B.010  (Supp.  1982);  Md.  Health-General  Code 
Ann.  §  19-102(a)  (Supp.  1985);  Neb.  Rev.  Stat.  §  71-5802  (Supp.  1984);  N.H.  Rev. 
Stat.  Ann.  §  151-c:l  (Supp.  1983);  N.J.  Stat.  Ann.  §  26:2H-1  (West  Supp.  1985);  N.Y. 
Pub.  Health  Law  §  2800  (McKinney  1985);  N.C.  Gen.  Stat.  §  131E-175  (Supp.  1983); 
Or.  Rev.  Stat.  §  442.025(1)  (Supp.  1983);  35  Pa.  Cons.  Stat.  Ann.  §  448.102  (Purdon 
Supp.   1985);  Vt.  Stat.  Ann.  tit.   18,  §  2400  (1983). 

"Alaska  Stat.  §  18.07.041  (Supp.  1984);  B.C.  Code  Ann.  §  32-304(a)  (1981) 
(incorporating  by  reference  42  C.F.R.  §  123.412(a)(18)  (1985));  Fla.  Stat.  Ann. 
§  381.494(6)(c)(2)  (Supp.  1985);  Mont.  Code  Ann.  §  50-5-304(d)  (1985),  §  50-5-304(h)  (1985) 
(incorporating  by  reference  42  C.F.R.  §  123.412(a)(18)  (1985));  S.D.  Codified  Laws  Ann. 
§  34-7A-38(12)  (Supp.  1984);  Wash.  Rev.  Code  Ann.  §  70-38-115(2)0)  (Supp.  1985);  W. 
Va.  Code  §  16-2D-6(a)(22)  (1985);  Wis.  Stat.  Ann.  §  150.39(10)  (West  Supp.  1985) 
(nursing  homes). 


1030  INDIANA  LAW  REVIEW  [Vol.  19:1025 

quality  of  care  in  proposed  facilities  and  services.^"  Most  other  states 
include  quality  of  care  considerations  in  their  certificate  of  need  regu- 
lations, often  by  incorporation  of  NHPRDA  past  quality  standards.^' 

The  quality  protective  function  of  certificate  of  need  may  be  merged 
with  its  cost  containment  role.  A  number  of  epidemiological  studies  have 
demonstrated  an  association  between  volume  of  services  provided  in 
health  facilities  and  reduced  mortality  rates,  suggesting  that  as  well  as 
controlling  costs,  preventing  excess,  underutilized  capacity  improves  qual- 
ity of  care.^^  The  optimum  service  size  standards  found  in  certificate  of 
need  review  criteria  are  based  on  these  quality  considerations." 

Third,  certificate  of  need  programs  may  be  used  to  achieve  a  uniform 
geographic  distribution  of  health  services^"*  or  an  equitable  distribution 


-"Ark.  Stat.  Ann.  §  82-23 11(d)  (Supp.  1985);  Fla.  Stat.  Ann.  §  381.494(6)(c)(3) 
(Supp.  1985);  Ga.  Code  Ann.  §  31-6-42(a)(13)  (1985);  Ky.  Rev.  Stat.  §  216B.040(2)(a)(2)(e) 
(Supp.  1982);  Me.  Rev.  Stat.  Ann.  tit.  22,  §  309(1)(A)  (Supp.  1985);  R.I.  Gen.  Laws 
§  23-15-4(d)(7)  (1985). 

-'See  42  U.S.C.  §  300n-l(c)(14)  (1982);  42  C.F.R.  §   123.412(a)(18)  (1985). 

-See,  e.g..  Flood,  Scott  &  Ewy,  Does  Practice  Make  Perfect?  Part  I:  The  Relation 
Between  Hospital  Volume  and  Outcomes  for  Selected  Diagnostic  Categories,  22  Med. 
Care  98  (1984);  Flood,  Scott  &  Ewy,  Does  Practice  Make  Perfect?  Part  II:  The  Relation 
Between  Volume  and  Outcomes  and  Other  Hospital  Characteristics,  11  Med.  Care  115 
(1984);  Luft,  The  Relations  Between  Surgical  Volume  and  Mortality:  An  Exploration  of 
Causal  Factors  and  Alternative  Models,  18  Med.  Care  940  (1980);  Luft,  Bunker  & 
Enthoven,  Should  Operations  Be  Regionalized:  The  Empirical  Relation  Between  Surgical 
Volume  and  Mortality,  301  New  Eng.  J.  Med.  1364  (1970).  It  is  postulated  that  increased 
volume  is  associated  with  diminished  mortality  rates  because  of  a  "learning  curve"  effect. 
Flood,  Scott  &  Ewy,  supra,  at   123. 

-'E.g.,  Or.  Admin.  R.  409-03-010(1 3)(b)  (1985)  (quality  of  care  of  proposed  projects 
measured  by  sufficiency  of  expected  volume  to  maintain  staff  skills);  see  also  Humana, 
Inc.  V.  Department  of  Health  «fe  Rehabilitative  Servs.,  469  So.  2d  889  (Fla.  Dist.  Ct. 
App.  1985)  (quality  concerns  justified  criterion  basing  need  for  new  facilities  on  full 
utilization  of  existing  facilities);  National  Guidelines  for  Health  Planning  (a  set  of  national 
"need"  standards  required  to  be  considered  by  all  state  and  local  health  planning  agencies) 
regarding  neonatal  special  care  units,  open  heart  surgery,  cardiac  catheterization,  and 
radiation  therapy,  42  C.F.R.  §§  121.204,  .205,  .207,  .209  (1985).  Each  specifies  a  minimum 
volume  of  services  identified  by  medical  authorities  as  necessary  to  maintain  quality  of 
care. 

-^Standards  for  acceptable  patient  travel  time  to  health  facilities  and  acceptable  risks 
of  queuing  at  the  facility  are  incorporated  into  states'  criteria  for  identifying  community 
need  for  new  projects.  E.g.,  Ala.  Code  §  22-21-264(4)(0  (1984)  (certificate  of  need  criterion 
of  "evidence  of  the  locational  appropriateness  of  the  proposed  facility  or  service  such  as 
transportation  accessibiHty  .  .  .");  Iowa  Code  Ann.  §  135.64(1)(8)  (West  Supp.  1985); 
Mont.  Code  Ann.  §  50-5-304(1  )(m)  (1985)  (CON  criteria  of  distance,  convenience,  cost 
of  transportation,  and  accessibility  of  health  services  for  persons  living  outside  urban 
areas);  Va.  Code  §  32. 1-102. 3(B)(6)  (1985)  (certificate  of  need  criteria  of  topography  and 
highway  facilities  in  area  proposed  to  be  served);  see  also  4,1  C.F.R.  §  121.201(b)  (1985) 
(National  Guidelines  for  Health  Planning  recommended  30  minute  travel  time  to  the  nearest 
hospital  for  general  acute  care). 


1986]  CERTIFICATE  OF  NEED  1031 

of  health  services  among  social  and  economic  groups. ^^  In  such  cases, 


--The  foremost  example  is  the  use  of  certificate  of  need  programs  to  encourage  and 
protect  health  care  facilities  that  internally  subsidize  socially  desirable  but  unprofitable 
lines  of  business.  For  reasons  of  legal  obligation  or  conscience,  facilities  may  offer  emergency 
or  routine  services  to  persons  unable  to  pay,  or  accept  Medicaid  or  other  public  program 
beneficiaries  for  whom  reimbursement  is  less  than  cost  or  less  generous  than  private  payer 
reimbursement.  Presumably,  such  facilities  price  other  services  or  charge  other  payers 
above  cost  to  recover  their  losses.  When  they  do,  it  creates  an  opportunity  for  other 
facilities  not  so  charitably  inclined  to  undercut  their  prices  and  capture  the  paying  market. 
Certificate  of  need  programs  can  protect  charitable  subsidizers  from  cream  skimmers  by 
denying  cream  skimmers  entry  into  the  marketplace.  See,  e.g..  Collier  Medical  Center  v. 
Department  of  Health  and  Rehabilitative  Servs.,  462  So.  2d  83  (Fla.  Dist.  Ct.  App.  1985) 
(new  hospital's  certificate  of  need  application  denied  to  protect  existing  hospitals  with 
high  indigent  patient  loads  from  loss  of  paying  patients,  needed  to  subsidize  indigent  care, 
to  new  hospital).  NHPRDA  requires  state  programs  to  use  several  criteria  designed  to 
achieve  this  effect  by  expressing  a  preference  for  health  care  facilities  that  serve  low- 
income  and  other  "medically  underserved"  patients.  42  C.F.R.  §  123.412(a)(6)  (1985).  See 
also  42  C.F.R.  §§  123.412(a)(5);  123.413  (1985).  Numerous  state  certificate  of  need  statutes 
also  have  medically-underserved  access  criteria.  E.g.,  Cal.  Health  &  Safety  Code 
§§  437.11(b)(4)(c),  437.116  (Deering  Supp.  1985)  (certificate  of  need  exemptions  for  facilities 
participating  in  Medicaid  or  providing  certain  volume  of  free  care);  D.C.  Code  Ann. 
§  32-305(a)(2)  (Supp.  1984)  (certificate  of  need  requirement  that  facilities  provide  a  reasonable 
volume  of  uncompensated  care);  Fla.  Stat.  Ann.  §  381.494(6)(c)(8)  (Supp.  1985);  Ga. 
Code  Ann.  §  31-6-42(a)(7),  (c)  (1985)  (waiver  of  strict  adherence  to  certificate  of  need 
criteria  for  minority  administered  hospital  facilities  serving  socially  and  economically 
disadvantaged  urban  populations);  Mich.  Comp.  Laws  Ann.  §  333.22131(l)(j),  (e)  (Supp. 

1985)  (certificate  of  need  criteria  of  access  to  residents  and  physicians,  nondiscrimination 
in  employment,  patient  admission  or  care,  room  assignment,  training  programs,  and  medical 
staff  membership);  Neb.  Rev.  Stat.  §  71-5853(1),  (3)  (Supp.  1985);  1985  N.H.  Laws  ch. 
378,  §  6  (to  be  codified  at  N.H.  Rev.  Stat.  Ann.  §  51-C:7(III))  (certificate  of  need 
criterion  of  degree  to  which  proposed  facility  is  accessible  to  medically  underserviced, 
including  handicapped  and  indigent);  N.C.  Gen.  Stat.  §  131E-183(3),  (3a),  (13)  (Supp. 
1983);  N.D.  Cent.  Code  §  23-17.2-05  (Supp.  1983)  (incorporating  by  reference  NHPRDA 
access  review  criteria);  Okla.  Stat.  Ann.  tit.  63,  §  2652.1(B)(3)(e),  (6)  (West  1984);  Pa. 
Cons.  Stat.  Ann.  §  448.707(a)(9),  (19)  (Purdon  Supp.  1985);  Va.  Code  §  32. 1-102. 3(B)(5) 
(1985);  Wash.  Rev.  Code  Ann.  §§  70.38. 115(2)(e),  (k)  (Supp.  1986)  (certificate  of  need 
criterion  of  hospital  meeting  or  exceeding  regional  average  level  of  charity  care);  W, 
Va.  Code  §  16-2D-6(a)(4),  (14),  (18),  (25)  (1979);  Executive  Budget  Bill,  Act  29,  1985 
Wis.  Legis.  Serv.  391  (West)  (to  be  codified  at  Wis.  Stat.  §  150.69(13)  (certificate  of 
need  requirement  of  acceptable  plan  for  provision  of  health  care  to  indigent);  see  also 
Idaho  Admin.  Code  §  02.11400.01(a)(v)  (1983)  (Idaho  section  1122  regulations);  N.J. 
Admin.  Code  tit.  8,  §  33-2. 1(a),  (b)  (1985)  (prohibition  on  issuance  of  certificate  of  need 
to  any  facility  that  fails  to  provide  or  contractually  commit  itself  to  provide  services  to 
medically  underserved  populations  residing  or  working  in  its  service  area  as  adjusted  for 
indications  of  need).  For  court  decisions  upholding  certificate  of  need  decisions  based  on 
the  performance  in  assuring  access  to  medical  care  to  the  indigent  or  medically  underserved, 
see  Collier,  462  So.  2d  83  (Fla.  Dist.  Ct.  App.  1985);  Doctors  Hosp.  of  Prince  George's 
County   v.    Maryland    Health    Res.    Plan    Comm'n,    501    A. 2d    1324   (Md.    Spec.    App. 

1986)  (hospital's  record  of  lower  Medicaid  and  indigent  patient  load  than  other  area  hospitals 
supported  denial  of  its  certificate  of  need  application);  Chambery  v.  Axelrod,  101  A.D.2d 
610,  474  N.Y.S.2d  865  (1984)  (certificate  of  need  preference  for  facilities  participating  in 


1032  INDIANA  LAW  REVIEW  [Vol.  19:1025 

certificate  of  need  regulation  finds  its  justification  not  in  market  failure, 
but  in  compensation  for  undesirable  consequences  of  market  functioning. 

Fourth,  states  may  adopt  certificate  of  need  programs  to  limit  public 
outlays  for  benefit  programs,  primarily  Medicaid,  or  as  adjuncts  to  state 
programs  regulating  health  facility  operating  expenses. ^^  For  example, 
states  have  used  certificate  of  need  to  control  or  to  limit  the  supply  of 
nursing  home  beds  in  order  to  limit  Medicaid  outlays  for  nursing  home 
care.^^ 

Fifth,  certificate  of  need  laws  may  be  adopted  to  assure  public 
participation  in  decision-making  respecting  major  health  facility  projects 
and,  by  extension,  in  the  overall  configuration  of  institutional  health 
care  delivery.  For  example,  the  Maryland  health  planning  statute  provides 
that  **The  citizens  of  this  State  have  a  fundamental  interest  in  planning 
the  development  of  quality  health  services  .  .  .  ."^^  It  establishes  local 
health  planning  agencies  and  a  consumer-dominated  state  health  planning 
commission,  and  gives  the  local  agencies  and  the  general  public  roles 
in  certificate  of  need  review. ^^^  NHPRDA's  provisions  for  local  health 
planning  agencies  evince  similar  purposes.^" 


Medicaid  upheld).  The  ultimate  effect  of  employing  certificate  of  need  in  this  fashion  is 
to  tax  indirectly  the  private  paying  patients  of  charitable  health  care  facilities  and  to  shield 
public  budgets  from  the  full  costs  of  socially  desirable  services. 

-''See  Mahler,  Barriers  to  Coordinating  Health  Services  Regulatory  Programs,  6  J. 
Health  Pol.  Pol'y  &  L.  528  (1981). 

^'Me.  Rev.  Stat.  Ann.  tit.  22,  §  307(6-A)  (Supp.  1985)  (comparative  review  of  new 
nursing  home  bed  addition  projects  based  on  availability  of  legislative  appropriations);  Mich. 
CoMP.  Laws  Ann.  §  333.22131(2)(f)  (Supp.  1985)  (certificate  of  need  criterion,  for  nursing 
home  bed  addition,  of  consideration  of  Medicaid  agency  plans);  Mont.  Code  Ann.  §  50-5-430(2) 
(1985)  (authority  to  condition  nursing  home  bed  additions  on  availabihty  of  Medicaid 
funding);  1985  N.H.  Laws  Ch.  378,  §  378:6  (to  be  codified  at  N.H.  Rev.  Stat.  Ann. 
§  151-C:5(II)(b))  (coverage  of  all  health  facility  transfers  of  ownership  except  those  subject 
to  federal  restrictions  on  asset  revaluation  for  Medicare/Medicaid  reimbursement  purposes); 
Pa.  Cons.  Stat.  Ann.  §  448.707(c)(7)  (Purdon  Supp.  1985)  (nursing  home  bed  addition 
criterion  of  consistency  with  Medicaid  agency  plans);  Vt.  Stat.  Ann.  tit.  18,  §  2406(a)(4) 
(Supp.  1985)  (certificate  of  need  criterion  for  nursing  home  bed  addition  of  consideration 
of  Medicaid  agency  plans);  Wis.  Stat.  Ann.  §  150.39  (West  Supp.  1985)  (nursing  home 
project  criteria  of  sufficient  Medicaid  funds  appropriated  to  reimburse  for  care  to  be 
provided,  and  statutory  ceiling  on  approveable  nursing  home  beds  to  enable  the  state  to 
accurately  establish  Medicaid  budget);  1985  Wise.  Legis.  Serv.  Act  29,  §  1975  (West)  (to 
be  codified  at  Wis.  Stat.  Ann.  §  150.31).  See  generally  Feder  &  Scanlan,  Regulating  The 
Bed  Supply  in  Nursing  Homes,  58  Milbank  Mem.  Fund  Q.  54  (1980). 

=^Md.  Health-General  Code  Ann.  §  19- 102(a)(2)  (Supp.   1985). 

'"Id.  at  (b)(5),   19-114,  19-118. 

'"42  U.S.C.  §§  300/-l,2,  300n-l  (1982)  (establishment  of  consumer-dominated  "health 
systems  agencies"  with  formal  role  in  certificate  of  need  review);  see  also  Del.  Code 
Ann.  tit.  16,  §  9301  (1984);  Fla.  Stat.  Ann.  §  381.493(2)  (Supp.  1985);  1975  Hawaii 
Sess.  Laws  ch.  178,  Sec.  1;  Mich.  Comp.  Laws  Ann.  §  333.22131(l)(m)  (Supp.  1985) 
(certificate  of  need  criterion  of  non-profit  health  facility  governance  by  body  composed 
of  a  majority  consumer  membership  broadly  representative  of  the  population  served); 


1986]  CERTIFICATE  OF  NEED  1033 

Until  recently,  another  purpose  for  certificate  of  need  in  a  few  states 
was  to  avoid  financial  penalties  threatened  by  the  federal  government 
if  the  state  failed  to  adopt  a  certificate  of  need  statute.  From  1975 
through  1982,  NHPRDA  required  states  to  adopt  certificate  of  need 
laws  complying  with  its  model  provisions  in  order  to  receive  funding 
under  the  Act  and  to  avoid  severe  financial  penalties.^'  Several  certificate 
of  need  laws  passed  after  1975  cite  NHPRDA  compliance  and  avoidance 
of  financial  penalties  as  a  reason  for  their  adoption. ^^ 

III.  Certificate  of  Need  Before  NHPRDA 

A.  Early  Federal  Support  for  Health  Planning 

Federal  support  for  non-regulatory  governmental  planning  of  hospital 
and  other  health  facility  services  began  with  the  Hospital  Survey  and 
Construction  Act  of  1946,  popularly  known  as  the  Hill-Burton  Act.^^ 
During  its  three  decades  of  operation,  the  Hill-Burton  Act  provided 
grants  in  participating  states  for  construction  and  modernization  of 
hospital  and  other  health  care  facilities.  A  state  Hill-Burton  agency  was 
required  to  prepare  a  medical  facilities  plan  setting  forth  the  number 
of  facilities  of  various  kinds  in  the  state,  the  relative  need  for  new 
facilities,  and  their  appropriate  distribution.  In  turn,  construction  grant 
applicants  had  to  conform  to  the  plan  and  were  required  to  secure  the 
approval  of  the  Hill-Burton  agency.  When  first  enacted,  Hill-Burton 
provided  grants  only  to  hospitals  and  public  health  centers.^"*  The  list 
of  eligible  facilities  expanded  over  the  years  to  include,  at  one  time  or 
another,  nursing  homes,  rehabilitation  facilities,  chronic  disease  hospitals, 
diagnostic  or  treatment  centers,^^  outpatient   facilities,   hospital-related 


Wash.  Rev.  Code  Ann.  §  70.38.015(1)  (Supp.  1986)  (state  policy  to  encourage  consumer 
and  provider  involvement  in  health  planning);W.  Va.  Code  §  16-2D-6(a)(26)  (1985)  (cer- 
tificate of  need  criterion  of  existence  of  a  mechanism  for  soliciting  consumer  input  into 
the  health  care  facilities  decision-making  process). 

"See  infra  note  81  and  accompanying  text. 

^^975  Hawaii  Sess.  Laws  ch.  178,  Sec.  1  (purpose  of  certificate  of  need  legislation 
is  to  conform  to  NHPRDA  requirement);  N.C.  Gen.  Stat.  §  131E-175(5)  (Supp.  1983) 
(legislative  finding  that  failure  to  adopt  certificate  of  need  law  would  cause  state  to  lose 
in  excess  of  $55  million  in  federal  funds);  Tex.  Rev.  Civ,  Stat.  Ann.  art.  4418h,  §  1.01 
(1976)  (repealed  1985)  (purpose  of  certificate  of  need  statute  is  to  meet  requirements  of 
NHPRDA).  C/.  Colo.  Rev.  Stat.  §  25-3-502(6)  (1982)  (legislative  finding  that  certificate 
of  need  provisions  differ  from  federal  requirements,  but  advance  state's  own  goals  of 
quality  assurance,  access,  and  cost -effectiveness). 

^Tub.  L.  No.  79-725,  60  Stat.  1040  (1946)  (codified  as  amended  at  42  U.S.C.  § 
291-2910-1  (1982)). 

'^Pub.  L.  No.  79-725  §  2,  60  Stat.   1040  (1946). 

'Tub.  L.  No.  83-482,  68  Stat.  461  (1954). 


1034  INDIANA  LAW  REVIEW  [Vol.  19:1025 

extended  care  facilities  and  home  health  services,  equipment  acquisitions, 
and  emergency  rooms. ^^  In  later  years,  authority  for  grants  to  voluntary 
local  health  planning  agencies  to  assist  in  the  process  of  planning  for 
community  needs  was  incorporated  into  Hill-Burton.^^ 

In  1966,  Congress  authorized  new  funding  for  state  and  local  public 
or  non-profit  planning  agencies  to  perform  * 'comprehensive  health  plan- 
ning," an  activity  with  broader  implications  than  disbursement  of  con- 
struction funds. -'^  The  state  agencies  identified  public  and  private  facilities, 
services,  and  personnel  required  both  to  meet  the  health  needs  of  the 
state's  population  and  to  encourage  cooperative  efforts  among  health, 
education,  welfare,  and  rehabilitation  providers  and  agencies.  Local  agen- 
cies developed  comprehensive  regional  or  metropolitan  plans  for  coor- 
dination of  existing  and  projected  services.  In  1967,  the  comprehensive 
health  planning  laws  were  amended  to  require  the  state  comprehensive 
health  planning  agency  to  assist  health  care  facilities  in  developing  in- 
dividual programs  for  capital  expenditures  consistent  with  an  overall 
state  plan,  and  to  provide  for  periodic  state  review  of  the  facilities' 
capital  expenditure  programs.  ^'^  The  comprehensive  health  planning  agen- 
cies were  expected  to  provide  consultation,  not  to  control  or  regulate 
facility  expenditures. "*"  Nevertheless,  the  amendment  clearly  authorized, 
through  the  health  planning  process,  official  oversight  of  health  facility 
expenditures  and  projects  not  financed  with  Hill-Burton  or  other  federal 
funds.  In  this  sense,  this  change  was  the  progenitor  of  federal  require- 
ments for  health  planning  regulation  through  certificate  of  need. 

Regulations  implementing  the  1967  amendments  listed  the  health  care 
facilities  whose  capital  expenditures  were  subject  to  review  to  include: 

All  hospitals,  sanitariums,  nursing  homes,  and  other  facilities 
for  the  inpatient  care  of  the  sick,  injured,  or  disabled,  which 
are  licensed  or  formally  approved  for  such  purposes  by  an 
officially  designated  state  standards-setting  authority,  and  all 
public  or  private  non-profit  clinics,  health  centers,  and  other 
facilities  a  major  purpose  of  which  is  to  provide  diagnostic. 


"•Pub.   L.  No.  91-296,  84  Stat.  336  (1970). 

'Tub.  L.  No.  88-443,  §  2,  78  Stat.  447  (1964). 

"^Comprehensive  Health  Planning  and  Public  Health  Services  Amendments  of  1966, 
Pub.  L.  No.  89-749,  80  Stat.   1180  (codified  as  amended  at  42  U.S.C.  §  246  (1982)). 

^'Partnership  for  Health  Amendments  of  1967,  Pub.  L.  No.  90-174,  81  Stat.  533. 

'"See  S.  Rep.  No.  724,  90th  Cong.,  1st  Sess.,  reprinted  in  1967  U.S.  Code  Cong. 
&  Admin.  News  2076,  2078  ("This  new  requirement  is  intended  to  provide  for  assistance 
in  the  planning  activities  of  health-care  facilities,  but  is  not  intended  to  serve  as  a  vehicle 
for  control  of  the  capital  expenditure  plans  of  any  institution.  The  paragraph  is  designed 
to  aid  health  care  facilities  in  providing  for  more  orderly  planning  so  as  to  aid  them  in 
eliminating  duplications  and  overlaps  between  the  services  they  provide  and  the  services 
provided  by  other  facilities  serving  the  same  general  area."). 


1986]  CERTIFICATE  OF  NEED  1035 

preventive,  or  therapeutic  outpatient  health  care  by  or  under  the 
supervision  of  doctors  of  medicine,  osteopathy,  or  dentistry; 
provided,  that  such  term  shall  not  include  facilities  operated  by 
religious  groups  relying  solely  on  spiritual  means  through  prayer 
and  healing  and  in  which  health  care  by  or  under  the  supervision 
of  doctors  of  medicine,  osteopathy,  and  dentistry  is  not  pro- 
vided/' 

The  regulations  also  provided  that  the  expenditures  subject  to  review 
would  include  all  capital  expenditures  of  any  amount  for  "replacement, 
modernization,  or  expansion. "'•^ 

These  provisions  drew  virtually  every  type  of  institutional  health  care 
provider  and  expenditure  within  the  purview  of  comprehensive  health  plan- 
ning. Their  inclusivity  arose  out  of  comprehensive  health  planning 's  origin 
in  Hill-Burton  planning  (the  scope  of  which  naturally  encompassed  all 
the  facilities  and  services  Hill-Burton  would  fund)  and  out  of  a  desire 
on  the  part  of  the  federal  government  and  the  health  planning  commun- 
ity to  oversee  every  aspect  of  health  service  delivery."*^  This  viewpoint  was, 
in  turn,  an  outgrowth  of  the  widely-held  expectation  among  health  policy- 
makers at  the  time  that  prevailing  economic  and  social  forces  would  lead 
to  centralized  control  of  health  services  delivery  in  the  United  States  along 
the  lines  of  the  national  health  services  or  universal  health  insurance 
systems  of  western  European  countries.'*'*  If  such  developments  were  in- 
evitable, comprehensive  health  planning  with  very  broad  jurisdiction  and 
built-in  input  from  local  communities  seemed  to  be  a  logical  prelude  to 
their  implementation  in  an  American  setting.'*^ 

Notably  absent  from  these  early  federal  ventures  into  health  planning 
is  any  evidence  of  concern  with  distortions  in  the  health  care  marketplace 
that  might  lead  to  excess  capacity.  The  Hill-Burton  program  was  intended 
to  solve  the  opposite  problem — insufficent  private  investment  in  health 
facilities.  The  comprehensive  health  planning  legislation  speaks  of  encourag- 
ing efficiency  and  economy  through  planning,  but  in  the  sense  of  rational 
resource  management  rather  than  of  compensation  for  market  defects. ''^ 


^'42  C.F.R.  §  51.4(i)  (1969)  (repealed  1976). 

'-Id. 

^'Applicable  regulations  defined  the  scope  of  comprehensive  health  planning  to  en- 
compass the  "health  services,  facilities  and  manpower  to  meet  the  physical,  mental,  and 
environmental  health  needs  [of  the  populace]  and  the  financial  and  organizational  resources 
through  which  these  needs  may  be  met  .  .  ."  42  C.F.R.  §  51.4(cXl)  (1967)  (repealed  1976). 

^See  generally  The  Region alization  of  Personal  Health  Services  (E.  Saward  ed. 
1976). 

''See  M.  RoEMER,  Comparative  National  Policies  on  Health  Care  202  (1977). 

'"See  Comprehensive  Health  Planning  and  Public  Health  Services  Amendments  of 
1966,  Pub.  L.  No.  89-749,  §  2,  80  Stat.  1180  (legislative  findings  and  declaration  of 
purpose  to  promote  health  through  public/private  partnership  planning  for  health 
services,  manpower,  and  facilities). 


1036  INDIANA  LAW  REVIEW  [Vol.  19:1025 

However,  a  concern  for  preservation  of  quality  of  care  and  assurance  of 
geographic  and  income-related  access  is  evident  in  these  programs/^ 

B.     Adoption  of  Certificate  of  Need  Laws  by  the  States 

While  voluntary  health  planning  agencies  were  appearing  in  the  states 
and  beginning  to  receive  federal  funding,  several  states  had  adopted 
certificate  of  need  laws.  The  first  was  New  York,  which  enacted  its 
statute  in  1966  after  promoting  regional  voluntary  planning  since  1946/^ 
Converting  voluntary  health  planning  into  a  regulatory  mechanism  ap- 
pealed to  other  states/*^  in  the  next  six  years,  twenty  states  adopted 
some  kind  of  certificate  of  need  program. ^°  By  the  end  of  the  1973 
legislative  sessions,  four  more  states  had  added  certificate  of  need  re- 
quirements and  a  total  of  twenty-three  states  had  such  programs.^' 
Administrative  responsibility  for  certificate  of  need  programs  was  often 


^The  Hill-Burton  Act  conditioned  the  receipt  of  grant  funds  on  a  health  facility's 
agreement  to  provide  a  reasonable  volume  of  uncompensated  services  and  to  make  its 
facilities  available  to  all  persons  residing  in  the  area  without  discrimination  on  account 
of  race,  creed,  or  color.  Pub.  L.  No.  79-725.  §  2,  60  Stat.  1041  (1946).  See  generally 
Rose,  Federal  Regulation  of  Services  to  the  Poor  Under  the  Hill-Burton  Act:  Realities 
and  Pitfalls,  70  Nw.  U.L.  Rev.  168  (1975);  Wing,  The  Community  Service  Obligation 
of  Hill-Burton  Health  Facilities,  23  B.C.L.  Rev.  577  (1982).  The  Act  also  mandated 
minimum  maintenance  and  operation  standards  for  funded  projects,  and  prompted  many 
states  first  to  adopt  health  facility  licensure  programs.  See  A.  Somers,  Hospital  Regu- 
lation: The  Dilemma  of  Public  Policy  118-32  (1969).  The  comprehensive  health  planning 
program  combined  these  concerns  in  its  announced  goal  of  assuring  "comprehensive  health 
services  of  high  quality  for  every  person."  Id. 

^"Hearings  on  H.R.  6084  Before  the  Subcomm.  on  Health  and  Environment  of  the 
House  Comm.  on  Energy  and  Commerce,  97th  Cjng.,  2d  Sess.  58  (1982)  (testimony  of 
James  R.  Tallon,  Jr.,  Chairman,  Committee  on  Health,  Nev^  York  State  Assembly). 

^''Differing  opinions  as  to  the  reason  states  adopted  certificate  of  need  laws  have 
been  offered.  According  to  Curran,  state  legislators  grafted  CON  programs  onto  voluntary 
health  planning  programs  in  response  to  public  concern  for  rising  hospital  and  health 
insurance  costs.  Curran,  supra  note  15,  at  88-90.  Havighurst  suggests  that  certificate  of 
need  laws  were  adopted  to  strengthen  voluntary  health  planning  and,  in  some  states,  to 
limit  proprietary  hospital  expansion.  Havighurst,  supra  note  15,  at  1148-50.  Payton  and 
Powsner  attribute  the  passage  of  CON  legislation  to  the  efforts  of  the  voluntary  hospital 
establishment  to  forestall  rate  regulation  and  solidify  its  dominance  of  the  hospital  market. 
Payton  &  Powsner,  Regulation  Through  the  Looking  Glass:  Hospitals,  Blue  Cross,  and 
Certificate  of  Need,  17  Mich.  L.  Rev.  203  (1980).  Certificate  of  need  legislation  was 
supported  by  the  health  planning  establishment,  the  American  Hospital  Association,  Blue 
Cross,  state  insurance  commissioners,  and  various  business  and  labor  groups,  and  opposed 
by  medical  professional  organizations,  proprietary  hospitals,  and  nursing  home  operators. 
Curran,  supra  note  15,  at  90.  The  legislatures  themselves  appear  to  have  been  motivated 
by  multiple  concerns  for  cost  containment,  quality  preservation,  access  assurance,  and 
public  participation  in  health  facility  decision-making.  See  supra  notes  16-30  and  accom- 
panying text. 

■"Curran,  supra  note  15,  at  85. 

"Havighurst,  supra  note  15,  at   1143-44. 


1 


1986]  CERTIFICATE  OF  NEED  1037 

assigned  to  comprehensive  health  planning  agencies,  which  were  often 
instrumental  in  securing  passage  of  the  certificate  of  need  laws.^^ 

Certificate  of  need  programs  adopted  at  this  time  varied  considerably 
in  their  scope  of  coverage.  They  generally  covered  a  narrower  range  of 
facilities  and  projects  than  were  to  be  covered  under  subsequent  federal 
regulatory  health  planning  initiatives.  A  contemporary  survey  reported 
that  nineteen  programs  subjected  hospitals  and  nursing  homes  to  reg- 
ulation." One  state  (Oklahoma)  covered  nursing  homes,  but  not  hos- 
pitals.^"^  Three  states  (Michigan,  Oregon,  and  Rhode  Island)  covered 
hospitals,  but  not  nursing  homes. ^^  About  half  subjected  freestanding 
outpatient  facilities  to  review.  None  extended  coverage  to  individual 
physician's  offices. 

Under  project  coverage,  most  states  reviewed  "capital  expenditures" 
or  similarly-labeled  expansions  of  physical  plants.  Virtually  all  states  had 
expenditure  '^thresholds,"  dollar  amounts  below  which  capital  expend- 
itures by  health  facilities  were  not  subject  to  review.  The  expenditure 
thresholds  varied  widely  from  $25,000  to  $350,000.^^  Over  half  of  the 
states  expressly  covered  increases  in  bed  supply  whether  or  not  associated 
with  a  capital  expenditure.  All  appeared  to  cover  substantial  expansion 
in  services,  sometimes  without  regard  to  expenditure  thresholds.  Ac- 
quisitions of  medical  equipment  were  expressly  subjected  to  review  in 
about  half  of  the  states,  frequently  with  expenditure  thresholds.  However, 
several  states  exempted  replacement  of  equipment.  Finally,  ten  states 
covered  both  reductions  in  bed  supply  and/or  termination  of  services." 

C.     Section  1122 

Congressional  concern  with  the  costs  of  institutional  health  services 
rose  as  the  costs  of  the  Medicare  and  Medicaid  programs,  established 
in  1965,  increased.  Among  the  reasons  for  increasing  Medicare  and 
Medicaid  costs  was  the  programs'  open-ended  payment  to  providers  on 
the  basis  of  costs  incurred  in  the  provision  of  services  to  beneficiaries.^^ 
In  addition  to  paying  for  reasonable  costs  directly  associated  with  patient 
care.  Medicare  and  Medicaid  paid  for  "capital  costs,"  i.e.,  actual  costs 
of  interest  on  capital  indebtedness,  an  allowance  for  depreciation  on 
capital  assets,  and  a  fixed  rate  of  return  on  equity  capital  used  by 


"H.R.  Rep.  No.  231,  92d  Cong.,  2d  Sess.,  reprinted  in  1972  U.S.  Code  Cong.  & 
Admin.  News  4989,  5065-66. 

''Havighurst,  supra  note  15,  at   1144. 

''Id.  at   1145. 

'Ud.  at  1146  n.lO. 

'''Id.  at   1146  n.9. 

''Id.  at   1145-47. 

"''See  Kinney  &  Lefkowitz,  Capital  Cost  Reimbursement  to  Community  Hospitals 
Under  Federal  Health  Insurance  Programs,  1  J.  Health  Pol.  Pol'y  &  L.  648  (1982). 


1038  INDIANA  LAW  REVIEW  [Vol.  19:1025 

proprietary  health  facilities  for  patient  care.^'^  The  Social  Security  Amend- 
ments of  1972  contained  several  measures  designed  to  restrain  Medicare 
and  Medicaid  program  cost  increases  caused  by  incurred-cost  reimburse- 
ment. They  included  mandatory  utilization  review,  ceilings  on  payment 
for  routine  hospital  inpatient  costs,  and  the  so-called  **section  1122" 
program.^  Section  1122  authorized  the  Secretary  of  Health,  Education 
and  Welfare  to  contract  with  individual  states  for  a  review  and  rec- 
ommendation to  the  Secretary  on  the  community  need  for  capital  ex- 
penditures proposed  by  or  on  behalf  of  health  care  facilities  or  health 
maintenance  organizations.^'  State  recommendations  were  to  be  based 
on  state  health  plans,  including  those  adopted  by  comprehensive  health 
planning  and  Hill-Burton  agencies.  A  negative  state  recommendation 
usually  would  lead  to  withholding  by  the  Secretary  of  payment  under 
Medicare  and  Medicaid  for  capital  costs  associated  with  the  project. ^^ 
Although  section  1122's  enforcement  sanction — denial  of  federal  pro- 
gram reimbursement — differed  from  that  of  state  certificate  of  need 
programs,  its  purpose  was  similarly  to  deter  unnecessary  capital  invest- 
ment by  health  facilities.  An  additional  purpose  was  to  assure  that 
Medicare  and  Medicaid  reimbursement  supported  state  health  planning 
programs. ^^ 

J.  Section  1122  Coverage. — Despite  its  origin  in  congressional 
concern  over  distorted  incentives  in  Medicare  and  Medicaid  reimburse- 
ment, as  implemented  by  the  Department  of  Health  Education  and 
Welfare,  the  section  1122  program  extended  the  federal  government's 
practice,  begun  under  the  comprehensive  health  planning  program,  of 
imposing  extensive  review  requirements  on  virtually  all  categories  of 
health  facilities.  Health  care  facilities  subject  to  review  under  the  De- 
partment's regulations  encompassed  the  following:  hospitals,  psychiatric 
hospitals,  and  tuberculosis  hospitals,  skilled  nursing  facilities,  intermediate 
care  facilities,  home  health  agencies,  providers  of  outpatient  physical 
therapy  services  (including  speech  pathology  services),  kidney  disease  treat- 
ment centers  (including  freestanding  hemodialysis  units),  and  organized 
ambulatory  care  facilities  such  as  health  centers,  family  planning  clinics, 
and  surgicenters,  which  are  not  part  of  a  hospital  but  are  organized  and 
operated  to  provide  medical  care  to  outpatients.^'* 

In  addition  to  health  care  facilities,  health  maintenance  organizations 
were  subject  to  review.^^  Projects  were  subject  to  review  when  undertaken 

'-'Id. 

'•"Social  Security  Amendments  of  1972,  Pub.  L.  No.  92-603,  §  221,  86  Stat.   1329 
(codified  as  amended  at  42  U.S.C.  §  1320a-l  (Supp.  I  1983)). 
''See  generally  42  C.F.R.  §§  100.101-100.109  (1985). 
"-42  U.S.C.  §   1320a-l(d)  (1982). 
'•'42  U.S.C.  §  1320a-l(a)  (1982). 
'M2  C.F.R.  §   100.103(a)(1)  (1974). 
"^42  C.F.R.  §   100.103  (1974). 


1986]  CERTIFICATE  OF  NEED  1039 

by  or  on  behalf  of  health  care  facilities  or  health  maintenance  orga- 
nizations and  when  they  involved  capital  expenditures  that:  (1)  exceeded 
$100,000;  (2)  changed  the  bed  capacity  of  the  facility  with  respect  to 
which  such  expenditures  were  made;  or  (3)  substantially  changed  the 
services  of  the  facility  with  respect  to  which  such  expenditures  were 
made.^^  Capital  expenditures  that  changed  bed  capacity  and  substantially 
changed  services  were  defined  by  the  Department  of  Health,  Education, 
and  Welfare  in  the  following  manner: 

[A]  Capital  expenditure  that  * 'changes  the  bed  capacity"  of  a 
facility  means  a  capital  expenditure  that  results  in  any  increase 
or  decrease  in  licensed  capacity  under  applicable  state  or  local 
law,  or,  if  there  is  no  such  law,  the  number  of  beds  in  a  given 
facility  as  of  January  1,  1973,  as  determined  by  the  designated 
planning  agency. 

[B]  Capital  expenditure  that  '^substantially  changes  the  services" 
of  a  facility  means  a  capital  expenditure  that  results  in  the 
addition  of  a  clinically  related  (i.e.,  diagnostic,  curative,  or 
rehabilitative)  service  not  previously  provided  in  the  facility  or 
the  termination  of  such  a  service  that  had  previously  been  pro- 
vided in  the  facility.^^ 

The  extreme  breadth  of  section  1122  coverage  may  have  been  justified 
from  a  comprehensive  health  planning  perspective,  but  the  connection 
between  section  1122's  broad  coverage  and  the  cost  containment  concerns 
that  led  to  the  program's  adoption  was  difficult  to  identify.^^  The  list 
of  health  care  facilities  covered  under  section  1122  seems  to  have  been 
taken  from  the  list  of  institutional  providers  eligible  to  participate  in 
Medicare  or  Medicaid.^'  However,  excessive  capital  investment  of  acquisi- 
tion of  costly  new  technology  had  never  been  associated  with  several  of 
these  providers,  including  home  health  agencies,  outpatient  physical  therapy 
providers,  or  ambulatory  care  facilities.  In  fact,  such  providers  were  eligible 
for  Medicare  reimbursement  in  part  because  they  offered  less  capital- 
intensive,  lower-cost  substitutes  for  hospital  or  nursing  facility  care.^"  It 


'M2  U.S.C.  §   1320a-l  (Supp.  II   1972). 

"'42  C.F.R.  §§   100.103(a)(2)(iii),(iv)  (1974). 

""Reflecting  the  linkage  of  the  two  programs,  the  original  section  1122  regulations 
also  amended  the  comprehensive  health  planning  regulations  to  conform  their  definitions 
of  covered  health  care  facilities.  38  Fed.  Reg.  31,281  (1973)  (amending  42  C.F.R.  § 
51.4(i)(4)  (repealed  1976)). 

"''The  list  duplicated  the  list  of  Medicare-eligible  providers  in  large  part,  and  repeated 
the  facility  definitions  in  Medicare  or  Medicaid  regulations. 

'"The  Department  of  Health  and  Human  Services  eventually  revised  its  interpretation 
of  the  purposes  of  section  1122  with  regard  to  service  and  bed  terminations.  In  1983,  it 


1040  INDIANA  LAW  REVIEW  [Vol.  19:1025 

would  have  been  more  consistent  with  Medicare  and  Medicaid  cost  con- 
trol concerns  to  have  exempted  these  facilities  from  section  1122  in  order 
to  channel  investment  toward  them  and  away  from  institutional  providers. 
Similarly,  health  maintenance  organizations  were  a  then-unusual  form  of 
organized  health  care  delivery  favored  by  the  federal  government  because 
they  appeared  to  operate  with  internal  incentives  for  cost  containment 
and  reduced  investment.  They  would  also  have  been  likely  candidates  for 
exemption  from  section  1122  coverage. 

The  Department's  interpretation  of  the  statutory  phrases  "substantial 
change  in  services''  and  "change  in  bed  capacity"  to  include  decreases 
as  well  as  increases  in  bed  capacity  and  to  include  terminations  of 
services  as  well  as  service  additions  seems  clearly  inconsistent  with  the 
role  of  the  section  1122  program  to  compensate  for  distorted  Medicare 
incentives  to  excess  capacity.  The  purpose  for  covering  terminations  of 
beds  and  services  is  presumably  to  maintain  existing  services,  not  to 
reduce  capacity.  Like  the  decision  to  cover  a  very  broad  array  of  non- 
institutional  facilities,  the  Department's  decision  to  cover  terminations 
probably  arose  out  of  the  perception  that  section  1122  was  comprehensive 
health  planning's  successor,  with  the  same  broad  purposes.^' 

D.     Pre-NHPRDA  State  Participation  in  Capital  Expenditure  Review 

State  participation  in  the  section  1122  program  was  optional. ^^  By 
the  beginning  of  1975,  thirty-nine  states  and  two  territories,  many  of 
which  already  had  certificate  of  need  programs,  had  agreed  to  enter  the 
program. ^^  The  states'  willingness  to  do  so  may  have  been  due  in  part 
to  the  fact  that  section  1122  regulations  and  policy  guidelines  offered 
a  means  by  which  a  state  could  participate  in  section  1122,  but  waive 
review  of  some  of  the  exceedingly  broad  range  of  health  care  facilities 
and  projects  covered  by  section  1122.  A  state  was  permitted  to  "elect 

proposed  to  amend  the  section  1122  regulations  to  delete  coverage  of  decreases  in  bed 
capacity  and  termination  of  services  that  are  not  associated  with  capital  expenditures  in 
excess  of  the  current  expenditure  threshold.  48  Fed.  Reg.  36,395  (to  be  codified  at  42 
C.F.R.  §§  3 125. 102(a), (b)  (1983)).  The  preamble  to  the  proposed  regulations  stated  that 
such  a  deletion  would  be  "consistent  with  Section  1122's  central  purpose  of  assuring  that 
Medicare  and  Medicaid  funds  are  not  used  to  pay  higher  health  care  costs  that  result 
from  duplication  or  irrational  growth  of  health  care  facilities,  while  at  the  same  time 
advancing  the  policy  of  the  new  Medicare  prospective  payment  system,  which  provides 
health  care  facilities  with  incentives  to  eliminate  inefficient  services."  Id.  at  36,391. 

^-42  U.S.C.  §   1 320a- 1(6)(  1982). 

"Lewin  &  Assocs.,  Inc.,  The  Experience  with  the  Section  1122  Capital  Ex- 
penditure Review  Program  14-15  (1985)  (report  prepared  for  Office  of  Health  Planning 
and  Evaluation,  Office  of  the  Assistant  Secretary  for  Health,  U.S.  Dep't  of  Health  & 
Human  Services,  under  Contract  No.  282-83-0072)  distributed  in  Office  of  Health  Plan- 
ning, U.S.  Dep't  of  Health  &  Human  Services,  Program  Information  Letter  85-17 
(1985). 


1986]  CERTIFICATE  OF  NEED  1041 

not  to  review"  categories  or  classes  of  projects  identified  in  advance.^"* 
Although  the  extent  to  which  states  elected  not  to  review  in  order  to 
avoid  the  broad  requirements  of  section  1122  prior  to  the  passage  of 
NHPRDA  is  not  known,  states'  frequent  election  after  NHPRDA  suggests 
that  states  did  resort  to  this  provision  to  limit  review  scope7^ 

Twenty-six  states  had  certificate  of  need  programs,  and  seventeen 
states  had  both  certificate  of  need  and  1122  in  early  1975.^^  By  the  end 
of  1975,  every  state  except  West  Virginia  and  the  District  of  Columbia 
had  either  a  certificate  of  need  or  section  1122  program. ^^  In  short,  well 
before  the  adoption  of  the  NHPRDA,  the  vast  majority  of  states  had 
chosen  to  implement  certificate  of  need  or  capital  expenditure  review. 
Their  programs  were  generally  more  limited  in  scope  than  the  broad 
programs  favored  by  the  federal  government  at  the  time.  All  these  states 
later  accepted  NHPRDA  funding,  obliging  themselves  to  conform  to  its 
requirements.  However,  for  most  states,  the  initial  choice  to  adopt 
certificate  of  need  or  participate  in  section  1122  was  independent  of 
federal  requirements. 

IV.     Certificate  of  Need  Requirements  of  NHPRDA 

Although  regulatory  health  planning  through  certificates  of  need 
began  in  the  states,  it  became  fully  established  as  national  policy  with 
the  passage  of  NHPRDA.  As  originally  adopted,  NHPRDA  embodied 
the  ideal  of  comprehensive  health  planning:  management  of  the  health 
care  delivery  system  by  publicly-controlled,  decentralized  planning  or- 
ganizations. It  was  designed  to  induce  every  state  to  adopt  a  certificate 
of  need  law  conforming  to  federal  requirements;  to  give  local  planning 
agencies  an  official  role  in  state  planning  and  certificate  of  need  review; 
and  to  enhance  the  regulatory  toughness  of  state  programs  by  improving 
the  plans,  criteria,  and  methodologies  on  which  certificate  of  need  de- 
cisions were  based  and  providing  for  a  more  skilled  professional  staff 
for  planning  agencies. ^'^ 


'"Bureau  of  Health  Planning,  U.S.  Dep't  of  Health  &  Human  Services,  Election 
Not  to  Review  Under  the  Section  1122  Program,  Program  Information  Letter  82- 
04  (1981);  Division  of  Comprehensive  Health  Planning,  U.S.  Dep't  of  Health,  Ed- 
ucation &  Welfare,  DPA  Manual:  Guidance  and  Procedures  for  Designated  Plan- 
ning Agencies  in  Administering  Section  1122  of  the  Social  Security  Act  13  (1974). 
In  August  1983,  the  Department  proposed  to  codify  this  poHcy  in  amended  section  1122 
regulations.  See  48  Fed. Reg.  36,396  (1983)  (to  be  codified  at  42  C.F.R.  §  125.03). 

''E.g.,  Ga.  Admin.  Comp.  §  272-3-.03  (1984);  Iowa  Admin.  Code  §  470-201.9  (1982) 
(election  not  to  review  under  section  1122  all  projects  not  required  to  be  reviewed  by 
certificate  of  need  program). 

'"Chayet  &  Sonnenreich,  P.C,  supra  note  15,  at  5-6. 

'"A  good  account  of  the  adoption  of  NHPRDA  is  B.  Lefkowitz,  Health  Planning: 
Lessons  for  the  Future  (1983). 


1042  INDIANA  LAW  REVIEW  [Vol.  19:1025 

NHPRDA's  local  health  planning  agencies,  denominated  Health  Sys- 
tems Agencies  (HSA's),  replaced  voluntary  local  health  planning  boards. 
Elaborate  requirements  for  public  participation  on  HSA  governing  boards 
were  established  to  assure  that  HSA's  would  be  consumer-controlled  and 
representative  of  all  segments  of  the  population. ^'^  HSA's  had  the  task 
of  providing  community  based  health  planning  for  specified  geographical 
areas.  Typically,  there  were  three  or  four  such  health  service  areas,  each 
served  by  an  HSA,  within  each  state.  HSA's  also  were  required  to  be 
allowed  to  participate  in  state  certificate  of  need  reviews  by  conducting 
a  public  meeting  on  proposed  projects  and  submitting  recommended 
findings  with  respect  to  projects. 

NHPRDA  provided  for  designation  of  state  agencies,  denominated 
State  Health  Planning  and  Development  Agencies  (SHPDA's),  to  develop 
a  state  health  plan  incorporating  HSA  plans  and  to  administer  certificate 
of  need  programs.  A  state  advisory  panel  made  up  of  HSA  representatives 
was  mandated.  Certificate  of  need  programs  were  required  to  provide 
for  review  of  capital  expenditures,  substantial  changes  in  services,  and 
additions  of  beds  by  health  care  facilities.  NHPRDA  also  prescribed 
detailed  review  procedure  requirements  and  a  laundry  list  of  criteria  for 
evaluating  certificate  of  need  applications.  As  the  first  of  many  attempts 
over  the  years  to  merge  the  two  programs,  a  state  participating  in  section 
1122  was  required  to  designate  its  SHPDA  as  the  agency  to  perform  sec- 
tion 1122  reviews. 

NHPRDA  did  not  literally  compel  states  to  adopt  certificate  of  need 
programs  consistent  with  its  provisions.**"  Instead,  it  offered  financial 
inducements  to  do  so,  in  the  form  of  federal  funding  for  SHPDA's, 
and  penalties  for  failure  to  do  so.  The  penalties  initially  announced  were 
severe.  If  a  state  did  not  have  a  certificate  of  need  program  in  compliance 
with  NHPRDA  by  a  specified  date,  grants  and  contracts  under  numerous 
other  federal  health  programs  to  state,  local,  and  private  entities  in  the 
state  would  be  abruptly  cancelled.**'  The  funding  at  risk  could  amount 
to  tens  or  even  hundreds  of  millions  of  dollars  in  some  states."^  Because 
the  funding  at  risk  benefitted  such  diverse  groups  as  community  health 


^"Pub.  L.  No.  93-641,  §  3,  88  Stat.  2225,  2232-35  (1975)  (current  version  at  42 
U.S.C.  §  300/-1  (1982)). 

^"North  Carolina  ex  rel.  Morrow  v.  Califano,  445  F.  Supp.  532  (E.D.N.C.  1977), 
aff'd  mem.,  435  U.S.  962  (1978). 

"^See  Health  Planning  and  Resources  Development  Amendments  of  1979:  Hearings 
on  H.R.  3041  and  3167  Before  the  Subcomm.  on  Health  and  the  Environment  of  the 
House  Comm.  on  Interstate  and  Foreign  Commerce,  96th  Cong.,  1st  Sess.  108  (1979) 
(statement  of  Hale  Champion,  Undersecretary  of  HEW)  (NHPRDA  relies  on  "atomic 
bomb  theory  of  penalty"). 

"-Manor  Healthcare  Corp.  v.  Northwest  Community  Hosp.,  129  111.  App.  3d  291, 
295,  472  N.E.2d  492,  494  (1984)  (Illinois  would  lose  $465  million  over  four  years  if  not 
in  compliance). 


1986]  CERTIFICATE  OF  NEED  1043 

centers,  medical  students,  academic  health  researchers  funded  by  various 
national  institutes  of  health,  and  medical,  dental,  and  nursing  schools, 
NHPRDA  created  a  constituency  strongly  concerned  with  bringing  state 
certificate  of  need  programs  into  compliance.  Although  as  a  result  of 
repeated  congressional  postponement  of  effective  dates,"  the  compliance 
requirements  of  NHPRDA  never  became  effective,  the  threat  of  their 
enforcement  was  sufficient  to  induce  every  state  to  make  concerted, 
more  or  less  successful,  efforts  to  comply. 

A.     NHPRDA  Coverage 

NHPRDA's  certificate  of  need  coverage  provisions  were  a  revised 
version  of  those  in  section  1122,  which  were  based  on  comprehensive 
health  planning  and  Hill-Burton.  Their  source  thus  lay  in  the  concept 
of  systematic  management  of  health  care  delivery,  not  in  any  theory  of 
economic  regulation.  Although  eventually  scaled  back,  their  broad  scope 
and  mandatory  nature  led  states  to  adopt  certificate  of  need  programs 
with  more  extensive  coverage  than  states  would  otherwise  have  chosen. 

1.  NHPRDA  Coverage  of  Facilities. — Regulations  adopted  in  1977 
to  implement  NHPRDA  defined  the  health  care  facilities  subject  to 
certificate  of  need  review  to  include:  hospitals,  psychiatric  hospitals, 
tuberculosis  hospitals,  skilled  nursing  facilities,  intermediate  care  facilities, 
kidney  disease  treatment  centers  including  freestanding  hemodialysis  units, 
and  ambulatory  surgical  facilities.  In  addition,  health  maintenance  or- 
ganizations were  subject  to  review.^ 

Although  the  source  of  this  set  of  covered  facilities  was  the  prior 
section  1122  coverage  provisions,  there  were  several  deletions  from  the 
pre-NHPRDA  definitions.*^^  First,  providers  of  outpatient  physical  therapy 
were  no  longer  required  to  be  covered.  Second,  coverage  of  home  health 
agencies  was  deleted."^  The  reason  seems  to  have  been  a  belief  that 
market  forces  would  adequately  regulate  the  supply  of  these  two  types 
of  facilities. *^^  Third,  coverage  of  organized  ambulatory  health  care  fa- 
cilities was  deleted.  The  reasons  given  were  that  '*the  variety  of  forms 


^'^See  infra  note  166  and  accompanying  text. 

^M2  C.F.R.  §§   123.401,  404  (1977). 

"^The  original  NHPRDA  regulations  for  certificate  of  need  programs  also  amended 
the  section  1 122  regulations,  making  their  health  care  facility  coverage  identical  to  NHPRDA's. 

'^'•Home  health  services  were  also  excluded  from  the  health  services  subject  to  review, 
in  order  to  exclude  from  coverage  both  home  health  agencies  and  home  health  services 
offered  in  or  through  a  health  care  facility  or  health  maintenance  organization.  42  C.F.R. 
§  123.404(a)(4)  (1977). 

"'A  later  effort  to  reinstitute  coverage  of  home  health  agencies  was  rejected  in 
Congress  in  part  on  the  grounds  that  "the  supply  of  those  services  would  not  be  excessive 
if  they  were  not  regulated  and  that  market  forces  of  supply  and  demand  may  appropriately 
allocate  them."  H.R.  Rep.  No.   190,  96th  Cong.,   1st  Sess.  53,  76  (1979). 


1044  INDIANA  LAW  REVIEW  [Vol.  19:1025 

in  which  organized  ambulatory  health  care  facilities  manifest  themselves 
resulted  in  serious  definitional  difficulties  under  Section  1122''  and  that 
**in  light  of  the  uneven  national  distribution  of  organized  ambulatory 
health  care  facilities  in  the  states,  the  Secretary  has  decided  against 
establishing  a  uniform  national  method  for  dealing  with  the  problem  at 
this  time."*^^  In  fact,  there  was  considerable  debate  in  the  Department 
of  Health,  Education  and  Welfare  over  the  merits  of  ambulatory  facility 
coverage,  with  attention  focused  on  the  costs  associated  with  their  ac- 
quisition of  sophisticated  medical  equipment.  A  proposal  was  advanced 
to  cover  organized  ambulatory  health  care  facilities  that  generated  annual 
revenues  in  excess  of  $1,000,000/^  Although  this  proposal  was  not 
adopted,  NHPRDA  was  later  amended  in  response  to  these  concerns  to 
require  certificate  of  need  review  of  costly  medical  equipment  used  for 
inpatients  but  located  in  non-inpatient  settings. "^^ 

Since  1977,  the  set  of  entities  subject  to  certificate  of  need  review 
under  NHPRDA  and  section  1122  has  remained  substantially  unchanged.*^' 
To  its  credit,  the  Department  of  Health  and  Human  Services  has  resisted 
requests  to  reimpose  coverage  by  regulation  of  home  health  agencies, 
physician  offices,  and  various  types  of  ambulatory  care  facilities  originally 
covered  under  section  1122  or  comprehensive  health  planning  programs. ^^ 

2.  Projects  Subject  to  Review. — Over  the  years,  the  set  of  projects 
subject  to  review  under  NHPRDA  has  been  amended  frequently,  usually 
but  not  invariably  to  reduce  the  range  of  projects  subject  to  review. 
The  Act  originally  required  states  to  review  **new  institutional  health 
services,"  as  defined  by  the  Secretary. *^^  New  institutional  health  services 
were  defined  by  regulation  as: 

1.  Construction,  development,  or  establishment  of  a  new  health 
care  facility  or  health  maintenance  organization; 

2.  Capital  expenditures  by  or  on  behalf  of  a  health  care  facility 
or  health  maintenance  organization  in  excess  of  $150,000; 

3.  Increases  in  health  care  facility  or  HMO  bed  capacity,  bed 
category  changes,  and  bed  relocations;  and 

4.  New  clinically-related  health  services  offered  in  or  through  a 
health  care  facility  or  health  maintenance  organization.*^"* 


'*'*41   Fed.  Reg.   11,691  (1976)  (preamble  to  proposed  regulations). 

'"Iglehart,  The  Cost  and  Regulation  of  Technology:  Future  Policy  Directions,  55 
MiLBANK  Mem.  Fund  Q.  25,  40-43  (1977). 

^°See  infra  notes  237-40  and  accompanying  text. 

'''See  42  C.F.R.  §  123.401  (1985).  Rehabilitation  facilities  were  added  to  NHPRDA 
coverage  in  1979  and  have  been  proposed  to  be  added  to  section  1122. 

""See.  e.g.,  50  Fed.  Reg.  2009  (1985);  45  Fed.  Reg.  69,755  (1980). 

■^'42  U.S.C.  §  300m-2(a)(4)(A)  (1976). 

^42  C.F.R.  §   123.404  (1977). 


1986]  CERTIFICATE  OF  NEED  1045 

3.  New  Construction  and  Acquisition  Coverage. — Coverage  of  con- 
struction, development,  etc.,  was  a  catch-all  phrase  for  coverage  of 
new  hospital  construction.  It  was  probably  included  to  clarify  that  new 
facilities  as  well  as  expansion  of  existing  facilities  were  subject  to  review. 
Most  pre-NHPRDA  state  certificate  of  need  laws  contained  a  similar 
term,  and  although  it  was  deleted  from  the  federal  requirements  in 
1980,*^^  most  continue  to  do  so.*^^ 

Capital  expenditures  for  acquisitions  of  existing  health  care  facilities 
or  health  maintenance  organizations  were  exempt  from  mandatory  review; 
states  had  the  option  of  covering  such  transactions.*^^  A  rationale  for 
this  exemption  was  not  announced.  The  Department  had  previously  taken 
the  position  that  section  1122  coverage  of  capital  expenditures  in  excess 
of  $100,000  by  or  on  behalf  of  a  health  care  facility  included  coverage 
of  acquisitions  of  facilities,  and  it  was  not  apparent  why  the  same 
language  would  have  a  different  meaning  in  the  NHPRDA  context. "^^^ 
The  basis  for  the  exemption  was  probably  the  absence  of  a  strong 
justification  for  health  planning  agency  review  of  transactions  that  did 
not  necessarily  involve  changes  in  patient  care  services. "^"^ 

4.  Health  Maintenance  Organization  Coverage. — As  first  adopted, 
much  like  section  1122,  NHPRDA  required  coverage  of  new  institutional 
health  services  offered  by  or  on  behalf  of  health  maintenance  organi- 
zations.'^^' Both  the  health  care  delivery  component  of  a  health  main- 
tenance organization  and  its  administrative  and  insuring  aspects  were 
apparently  covered,  as  were  physicians  and  other  providers  who  con- 
tracted to  serve  HMO  beneficiaries.  An  incidental  effect  of  the  coverage 
of  health  maintenance  organizations  themselves  rather  than  health  care 
facilities  sponsored  by  HMO's  was  to  require  coverage  of  certain  service- 
related  projects  offered  by  health  maintenance  organizations  which  were 
not  required  to  be  covered  when  offered  by  other  health  care  facilities. 
For  example,  the  establishment  of  a  non-surgical  ambulatory  care  facility 
component  of  a  health  maintenance  organization  was  required  to  be 
covered  regardless  of  cost,  although  establishment  of  such  a  facility  by 
any  other  proponent  would  not  have  been  subject  to  review  unless 
associated  with  at  least  a  $150,000  capital  expenditure. 


■^^45  Fed.  Reg.  69,746  (1980)  (amending  42  C.F.R.  §   123.404  (1977)). 

"^See  Table  3. 

'''See  42  Fed.  Reg.  4008  (1977). 

'''See  41  Fed.  Reg.   11,706  (1976)  (proposing  42  C.F.R.  §  100.103(c)). 

■^Subsequent  NHPRDA  amendments  added  a  provision  requiring  coverage  of  ac- 
quisitions if  the  SHPDA  found  that  the  services  or  bed  capacity  of  the  facility  being 
acquired  would  be  changed  in  the  process.  Health  Planning  and  Resources  Development 
Amendments  of  1979,  Pub.  L.  No.  96-79,  117,  93  Stat.  592,  617-18  (codified  at  42  U.S.C. 
§  300m-6(d)  (1982)). 

'"•'42  U.S.C.  §  300n(5)  (1976). 


1046  INDIANA  LAW  REVIEW  [Vol.  19:1025 

From  the  time  of  their  adoption,  the  HMO  coverage  requirements 
of  NHPRDA  and  section  1 122  were  criticized  as  overbroad  and  a  potential 
hindrance  to  the  spread  of  HMO's.'"'  Congress  and  the  Department  of 
Health  and  Human  Services  soon  began  to  cut  back  the  HMO  coverage 
provisions.  In  1978,  all  references  to  HMO's  were  deleted  from  section 
1122.'"'  In  1979,  a  broad  HMO  exemption  from  NHPRDA  was  adopted. 
It  required  state  certificate  of  need  programs  to  exempt  HMO's  and 
inpatient  health  care  facilities  controlled  or  leased  for  a  period  of  years 
by  an  HMO  if  the  HMO  enrollment  was  at  least  50,000,  75%  of  the 
facilities'  patients  would  be  enrollees,  and  the  facility  would  be  geo- 
graphically accessible  to  the  enrollees.'"^  The  50,000  enrollee  requirement 
was  deleted  in  1981."*^  A  similar  but  even  broader  exemption  for  facilities 
used  by  HMO's  was  placed  in  section  1122  in  1983.'"^ 

5.  Increase  in  Expenditure  Threshold. — The  $150,000  NHPRDA 
capital  expenditure  threshold  represented  an  increase  over  the  $100,000 
level  under  the  section  1122  program.  This  was  the  first  of  repeated 
NHPRDA  and  section  1122  expenditure  threshold  increases  over  the 
years.  The  rationales  offered  for  this  first,  modest  increase  were  essentially 
the  same  as  those  offered  each  time  the  thresholds  have  been  increased 
— that  few  significant  capital  expenditures  cost  less  than  the  new,  elevated 
threshold,  and  that  due  to  inflation,  the  increase  retained  coverage 
unaltered  in  constant  dollars.'"^  Though  not  articulated  by  the  Depart- 
ment, an  additional  justification  for  this  and  subsequent  threshold  in- 
creases was  to  remove  certificate  of  need  programs'  authority  over 
projects  not  involving  major  expansion  of  clinical  health  services.  Health 
facilities,  particularly  hospitals,  routinely  incur  capital  expenditures  for 
physical  plant  maintenance  and  improvement  of  non-patient  care  areas 
and  equipment.  Health  planning  agencies  tend  to  be  drawn  into  reviewing 
these  costs  by  thresholds  at  the  $100,000  level.  Yet  the  agencies  possessed 
no  particular  expertise  to  oversee  the  decisions  of  health  facilities  on 
the  timing  and  amount  of  such  transactions,  the  relationship  between 
such  projects  and  the  rationales  for  certificate  of  need  regulation  were 
attenuated,  and  the  delay  caused  by  even  cursory  review  of  such  projects 
generated  considerable  objection  from  regulated  facilities.'"^ 


'"^See  Havighurst,  Health  Maintenance  Organizations  and  the  Health  Planners,  1978 
Utah  L.  Rev.   123,   141. 

'"-See  Health  Maintenance  Organizations  Amendments  of  1978,  Pub.  L.  No.  95-559, 
§  14(b)(l)-(3),  92  Stat.  2141. 

'"^Health  Planning  and  Resources  Development  Amendments  of  1979,  Pub.  L.  No. 
96-79,  Sec.   117(a),  93  Stat.  614  (codified  at  42  U.S.C.  §  300m-6(b)(l)  (1982)). 

'""Omnibus  Budget  Reconciliation  Act  of  1981,  Pub.  L.  No.  97-35,  §  949(c),  95  Stat. 
578. 

'"^Social  Security  Amendments  of  1983,  Pub.  L.  No.  98-21  §  607(c),  97  Stat.   172. 

"M2  Fed.  Reg.  4008  (1977). 

'"'See,  e.g..  Brown,  supra  note  12,  at  485-86. 


1986]  CERTIFICATE  OF  NEED  1047 

6.  Changes  in  Bed  Capacity. — Regulation  adopted  after  NHPRDA's 
passage  defined  bed  capacity  changes  subject  to  review  as 

[a]  change  in  bed  capacity  of  a  health  care  facility  or  health 
maintenance  organization  which  increases  the  total  number  of 
beds  (or  distributes  beds  among  various  categories  or  relocates 
such  beds  from  one  physical  facility  or  site  to  another)  by  more 
than  ten  beds  or  more  than  ten  percent  (10%)  of  total  bed 
capacity  as  defined  by  the  state,  whichever  is  less,  over  a  two 
year  period. '^'*^ 

Bed  category  changes  and  bed  relocations  had  not  been  subject  to  review 
under  the  1122  rules.  However,  the  Department  decided  to  subject  such 
transactions  to  certificate  of  need  coverage  on  the  grounds  that  substantial 
conversions  could  affect  the  delivery  and  cost  of  health  services.'"*^ 

Like  the  capital  expenditure  threshold  increase,  the  exemption  for 
'insubstantial"  changes,  i.e.,  bed  capacity  and  other  changes  of  ten 
beds  or  less  or  ten  percent  of  total  bed  capacity,  whichever  was  less, 
over  a  two-year  period,  was  intended  to  shift  regulatory  review  away 
from  relatively  minor  projects.  The  Department  had  considered  several 
versions  of  this  exemption.  It  initially  proposed  to  cover  any  addition, 
relocation,  or  category  change.""  Then,  an  extremely  generous  insub- 
stantial change  exemption  was  announced  in  the  adopted  regulations.  It 
exempted  bed  capacity  changes  of  less  than  forty  beds  or  twenty-five  per- 
cent of  total  bed  capacity,  whichever  was  less,  over  a  two-year  period.'"  This 
was  a  potentially  major  exemption  from  certificate  of  need,  particularly 
for  bed  category  conversions."^  In  recognition  of  the  size  of  this  loophole, 
shortly  thereafter  the  "forty  beds  or  twenty-five  percent"  exemption  was 
changed  to  the  **ten  beds  or  ten  percent"  provision."^  The  current 
federal  regulations  cover  substantial  bed  capacity  changes  associated  with 
any  capital  expenditure,  leaving  the  definition  of  exempt  insubstantial 
changes  up  to  individual  states.  ""* 


"M2  C.F.R.  §   123.404(a)(3)  (1977). 

'"^42  Fed.  Reg.  4008  (1977).  Required  coverage  of  bed  category  changes  and  bed 
relocations  was  deleted  from  the  federal  regulations  in  1985  in  order  to  allow  states  greater 
flexibility  in  operating  their  certificate  of  need  programs.  42  C.F.R.  §  123.404(a)(2)  (1985). 
See  50  Fed. Reg.  2008  (1985). 

""41  Fed.  Reg.   11,702  (1976)  (proposing  to  adopt  42  C.F.R.  §   123.404(a)(3)). 

'"42  Fed.  Reg.  4029  (1977)  (adopting  42  C.F.R.  §   123.404(a)(3)). 

"-A  forty  bed  addition  would  usually  generate  a  capital  expenditure  in  excess  of  the 
threshold  and  therefore  come  under  review  notwithstanding  the  exemption.  The  same  thing 
would  probably  be  true  for  bed  relocations.  However,  for  bed  conversions  the  provision 
would,  for  example,  allow  a  160-bed  acute  care  hospital  facility  to  convert  into  a  90-bed 
acute  care  facility  with  a  70-bed  skilled  nursing  unit  in  two  years  and  a  day,  assuming 
no  capital  expenditure  in  excess  of  $150,000. 

"H2  Fed.  Reg.   18,607  (1977)  (amending  42  C.F.R.  §  122.404(a)(3)). 

"M2  C.F.R.  §  123.404(a)(2)  (1985). 


1048  INDIANA  LAW  REVIEW  [Vol.  19:1025 

7.  Coverage  of  Changes  in  Health  Services. — The  initial  NHPRDA 
regulations  provided  for  coverage  of 

[h]ealth  services,  except  home  health  services,  which  are  offered 
in  or  through  a  health  care  facility  or  health  maintenance  or- 
ganization and  which  were  not  offered  on  a  regular  basis  in  or 
through  such  health  care  facility  or  health  maintenance  orga- 
nization within  the  twelve-month  period  prior  to  the  time  such 
services  would  be  offered."^ 

The  Department  of  Health  and  Human  Services  has  never  specified  the 
services  that  fall  within  the  term  "health  services,"  except  to  indicate 
that  the  term  refers  to  clinical  services."^  It  has  stated,  somewhat  un- 
helpfully, that  "Ia]ny  service  is  covered  if  it  is  included  in  the  scope 
of  coverage  developed  by  the  state. ""^  Additionally,  it  has  never  clarified 
whether  increases  in  the  volume,  intensity,  or  type  of  clinical  services 
provided  in  a  department  constitute  a  new  service,  or  whether  only  a 
new  department  or  cost  center  would  be  covered."^ 

8.  Bed  and  Service  Terminations. — Capital  expenditures  exceeding 
the  threshold  for  termination  or  reduction  of  beds  or  health  services 
were  also  exempted  from  capital  expenditure  coverage.  This  provision 
represented  a  departure  from  section  1122,  under  which  capital  expend- 
itures of  any  amount  for  termination  of  services  or  reduction  of  beds 
are  covered."*^  Although  the  Department  amended  the  NHPRDA  reg- 
ulations in  1980  to  require  coverage  of  capital  expenditures  associated 
with  bed  and  service  terminations,  it  recently  deleted  the  requirement 
once  again,  so  that  at  present,  states  are  not  required  to  cover  termi- 
nations.'^°  The  Department  has  also  proposed  to  delete  the  section  1122 
requirement  that  terminations  be  covered.'^' 


"^42  Fed.   Reg.  4029  (1977)  (adopting  42  C.F.R.  §   123.404(a)(4)). 

""50  Fed.   Reg.  2014  (1985)  (amending  42  C.F.R.  §   123.401). 

"M2  Fed.  Reg.  4008  (1977).  The  Department  has  occasionally  expressed  its  views  on 
whether  certain  activities  should  be  considered  new  services.  The  1977  regulations  excluded 
home  health  services  from  the  "health  services"  definition.  In  1979,  the  Department 
adopted  regulations  requiring  coverage  of  radiological  diagnostic  health  services  provided 
by  fixed  or  mobile  computed  tomography  (CT)  scanning  equipment  under  state  certificate 
of  need  programs.  42  C.F.R.  §  123.404(a)(5)  (1979)  (amended  1981);  see  also  42  C.F.R. 
§  100.103(a)(2)(iv)  (1985)  (addition  of  CT  scanning  is  a  substantial  change  in  services 
under  section  1 122). 

'"See  Community  Psychiatric  Centers  of  Or.,   Inc.  v.  Grant,  Civ.   No.  79-782  (D. 
Or.  July  8,   1980),  rev'd  on  other  grounds,  664  F.2d   1148  (9th  Cir.   1981)  (interpreting 
federal  regulations  to  cover  extensive  changes  in  the  level  or  volume  of  clinical  services). 
"42  C.F.R.  §§   100.103(a)(2)(iii),  (iv)  (1985). 
"42  C.F.R.  §§   123.404(a)(2),(3)  (1985). 

'-^See  48  Fed.  Reg.  36,395  (1983)  (to  be  codified  at  42  C.F.R.  §  125.102). 


1 1 4^ 
1:1)/ 


1986]  CERTIFICATE  OF  NEED  1049 

B.     State  Certificate  of  Need  Coverage  After  Passage  of  NHPRDA 

Passage  of  NHPRDA  prompted  more  states  to  adopt  certificate  of 
need  laws  so  that  by  1978,  forty  states  and  the  District  of  Columbia 
had  certificate  of  need  programs. '^^  All  but  one  of  these  covered  hospitals 
and  nursing  homes.  Georgia  was  the  exception,  covering  only  nursing 
homes.  Thirty-six  states  covered  ambulatory  surgical  facilities,  an  increase 
from  earlier  surveys  probably  due  to  coverage  of  such  facilities  under 
NHPRDA  and  section  1122.'^^  Twenty-four  states  covered  home  health 
agencies,  even  though  such  coverage  was  not  required  under  either 
NHPRDA  or  section  1122.'^^ 

Virtually  every  state  subjected  capital  expenditures  to  review,  in- 
cluding physical  plant  construction  and  other  major  capital  expenditures. 
Thresholds  varied  from  state  to  state,  though  less  than  they  had  in  1973. 
All  but  a  handful  of  states  had  $100,000  or  $150,000  thresholds. '^^  This 
consensus  on  expenditure  thresholds  was  undoubtedly  due  to  the  state 
participation  in  1122  or  NHPRDA,  which  had  $100,000  and  $150,000 
thresholds  respectively. 

All  but  two  states  expressly  covered  increases  in  bed  supply. '^^  This 
was  a  greater  number  than  had  covered  such  transactions  in  1973, 
probably  reflecting  national  concern  with  excess  bed  capacity  and  the 
coverage  of  such  transactions  under  1122  and  NHPRDA.  More  than 
half  of  the  states  continued  to  cover  even  single  bed  additions,  rather 
than  using  the  insubstantial  increase  exception  permitted  by  NHPRDA. 
However,  two  states  had  adopted  the  '*forty  beds  or  twenty-five  percent" 
increase  exemption  proposed  by  HEW  in  1977.'^^  Half  of  the  states 
covered  bed  supply  reductions.  All  but  three  states  covered  additions  of 
new  health  services.  Eighteen  states  covered  deletions  of  services  in  one 
form  or  another. '^^ 

C     Health  Planning  and  Resources  Development  Amendments  of 

1979 

In  late  1979,  there  was  dissatisfaction  in  Congress  with  implemen- 
tation of  NHPRDA.'^  The  costs  of  health  care  had  continued  to  increase 
at  a  steady  pace.  Congress  believed  that  excess  capacity,  the  target  of 
NHPRDA,  was  one  cause  of  the  increase.  However,  a  number  of  econ- 


'--Cohodes,  supra  note  7,  at  87-88. 
'-'Id. 
'-'Id. 
''-'Id. 
'"'Id. 

'-^Chayet  &.  SoNNENREiCH,  P.C.,  supra  note  15,  at   11. 
'-•^Cohodes,  supra  note  7,  at  88. 

'"H.R.  Rep.  No.  190,  96th  Cong.,  1st  Sess.  47-101  (1979);  S.  Rep.  No.  96,  96th  Cong., 
1st  Sess.  50-93,  reprinted  in  1979  U.S.  Code  Cong.  &  Admin.  News  1306,  1355-98. 


1050  INDIANA  LAW  REVIEW  [Vol.  19:1025 

ometric  studies  circulating  at  the  time  had  concluded  that  certificate  of 
need  programs,  as  then  constituted,  did  not  have  a  significant  impact 
on  the  rate  of  hospital  capital  investment.'^" 

In  addition,  certificate  of  need  programs  were  generating  a  significant 
amount  of  controversy  and  litigation.  A  series  of  well-publicized  reversals 
suggested  that  the  planning  agencies  wavered  between  rigidly  applying 
numerical  need  formulae  that  ignored  the  statutory  criteria  or  rulemaking 
requirements  and  issuing  unpredictable,  ad  hoc  rulings.'^'  Legal  com- 
mentators had  suggested  a  variety  of  reforms  in  the  review  process. '^^ 
There  was  great  concern  that  certificate  of  need  coverage  of  expenditures 
for  costly  medical  equipment  was  being  evaded.  Finally,  there  was  concern 
that  the  existing  pattern  of  certificate  of  need  coverage  in  the  law  and 
regulations  placed  a  very  heavy  workload  on  planning  agencies  and 
dictated  that  nearly  as  much  time  be  spent  on  projects  with  small  cost 
implications  as  on  major  projects. 

In  response.  Congress  passed  the  Health  Planning  and  Resources 
Development  Amendments  of  1979.'^^  In  spirit,  if  not  in  coverage  scope, 
they  narrowed  the  focus  of  federally-mandated  certificate  of  need  from 
general  health  system  management  to  economic  regulation.'^"*  Although 
cost  containment  was  a  dominant  purpose  of  the  amendments,  they  also 
added  statutory  provisions  mandating  as  review  criteria  the  accessibility 
of  proposed  services  and  the  quality  of  care  previously  provided  by  a 
certificate  of  need  applicant. '^^  A  number  of  important  procedural  changes 
were  adopted,  including  provisions  requiring  comparative  review  of  com- 


""See  Cohodes,  supra  note  7,  at  76-77  and  studies  cited  therein. 

'"See,  e.g..  North  Miami  Gen.  Hosp.,  Inc.  v.  Office  of  Community  Medical  Facilities, 
355  So.  2d  1272  (Fla.  Dist.  Ct.  App.  1978)  (inconsistent  application  of  criterion);  Huron 
Valley  Hosp.,  Inc.  v.  Michigan  State  Health  Facilities  Comm'n,  110  Mich.  App.  236,  312 
N.W.2d  422  (1981)  (undisclosed  preference  for  existing  facilities  over  new  construction); 
Irvington  Gen.  Hosp.  v.  Department  of  Health,  149  N.J.  Super.  461,  374  A.2d  49  (1977); 
Sturman  v.  Ingraham,  52  A.D.2d  882,  383  N.Y.S.2d  60  (1976)  (exclusive  reliance  on  bed 
need  formula  in  disregard  of  statutory  criteria). 

'^See,  e.g.,  Bovbjerg,  Problems  and  Prospects  for  Health  Planning:  The  Importance 
of  Incentives,  Standards,  and  Procedures  in  Certificate  of  Need,  1978  Utah  L.  Rev.  83, 
111-115;  Schonbrum,  Making  Certificate  of  Need  Work,  57  N.C.L.  Rev.   1259  (1979). 

'"Pub.  L.  No.  96-79,  93  Stat.  592  (1979). 

'''See  42  U.S.C.  §  300k-2  (Supp.  Ill  1979)  (legislative  finding  that  states  should 
exercise  the  certificate  of  need  function  under  NHPRDA  to  allocate  the  supply  of  health 
services  for  which,  by  reason  primarily  of  reimbursement  mechanism  distortions,  the  market 
does  not  or  will  not  do  so). 

"^42  U.S.C.  §§  300m-l(c)(6)(E),(14)  (1982).  The  legislative  history  of  these  provisions 
reveals  strong  support  for  planning  agency  use  of  certificate  of  need  programs  as  vehicles 
for  reducing  economic  barriers  to  medical  care  for  Medicare  and  Medicaid  beneficiaries 
and  the  medically  indigent.  S.  Rep.  No.  96,  96th  Cong.,  1st  Sess.  78,  reprinted  in  1979 
U.S.  Code  Cong.  &  Admin.  News  1306,  1374-76  (SHPDA's  and  HSA's  should  use  their 
full  range  of  authority  and  influence  to  remedy  access  problems). 


1986]  CERTIFICATE  OF  NEED  1051 

peting  applications  and  administrative  appellate  review  of  SHPDA  de- 
cisions on  certificate  of  need  applications.'^^  Several  provisions  were 
added  to  strengthen  certificate  of  need  decision-making  by  improving 
state  health  plan  development  and  making  consistency  with  the  state 
health  plan  the  primary  review  criterion. '^^  Finally,  after  the  amendments, 
NHPRDA  required  states  to  cover  capital  expenditures  exceeding  $150,000, 
capital  expenditures  substantially  changing  the  bed  capacity  of  a  health 
care  facility  or  substantially  changing  the  services  of  such  facility,  new 
institutional  health  services  entailing  annual  operating  costs  in  excess  of 
an  expenditure  minimum  of  $75,000,  and  acquisitions  of  major  medical 
equipment  costing  in  excess  of  an  expenditure  minimum  of  $150,000.'^* 

1.  Capital  Expenditure  Coverage. — Coverage  of  general  purpose 
capital  expenditures  exceeding  the  expenditure  minimum  remained  es- 
sentially as  it  was  prior  to  the  1979  amendment. '^^  Coverage  of  bed 
capacity  changes  and  service  changes  was  modified.  Previously  any  bed 
supply  increase,  decrease,  category  redistribution,  or  relocation  exceeding 
the  '*ten  beds  or  ten  percent*'  exemption  was  subject  to  review.  Now 
such  transactions  were  covered  only  if  a  capital  expenditure  was  incurred 
to  accomplish  them."*^  In  practice,  this  change  probably  served  to  exempt 
only  a  few  previously-covered  bed  supply  decreases  and  category  redis- 
tributions. 

Similarly,  where  previously  all  health  service  additions  were  covered, 
now  such  transactions  were  covered  only  if  associated  with  a  capital 
expenditure  (or,  as  noted  infra,  if  the  new  service's  annual  operating 
costs  exceeded  the  operating  cost  expenditure  threshold)."*'  Whether  or 
not  this  change  had  any  noticeable  effect  on  a  state's  scope  of  coverage 


'M2  U.S.C.  §§  300k-l(b)(12)(D),(13)(A)(iii)  (1982). 

'"42  U.S.C.  §§  300m-3,  300m-6(a)(5)  (1982). 

'M2  U.S.C.  §§  300m-6(a)(l),  300n(5)  (1982). 

"The  1979  amendments  did  authorize  states,  in  their  discretion,  to  begin  annually 
adjusting  their  capital  expenditure  (and  annual  operating  cost)  thresholds  upward  according 
to  an  index  of  changes  in  construction  costs.  Both  the  capital  expenditure  and  annual 
operating  cost  thresholds  were  eligible  for  adjustment.  A  state  opting  to  make  full  use 
of  the  adjustment  could  have  increased  its  thresholds  over  the  statutory  maximum  by  a 
total  of  23  percent  by  1985.  Applied  to  the  increased  capital  expenditure  threshold  authorized 
in  1981,  the  current  maximum  complying  capital  expenditure  threshold  would  be  $736,2(X). 
See  50  Fed.  Reg.  14,027  (1985). 

^'"Compare  42  C.F.R.  §  123.404(a)(3)  (1977)  with  42  C.F.R.  §  123.404(a)(2)  (1981) 
(amended  1985). 

'^'The  1979  amendments  were  also  interpreted  by  the  Department  of  Health  and 
Human  Services  to  provide  for  coverage  of  capital  expenditures  associated  with  the 
termination  of  a  health  service.  42  C.F.R.  §  123.404(a)(3)  (1981)  (amended  1985).  The 
Department's  rationale  for  covering  bed  and  service  terminations  was  that  such  coverage 
would  permit  states  to  use  certificate  of  need  programs  to  promote  accessibility  of  health 
services,  especially  to  the  indigent  and  medically  underserved.  See  45  Fed.  Reg.  69,757- 
81  (1980). 


1052  INDIANA  LAW  REVIEW  [Vol.  19:1025 

depended  greatly  on  the  state's  definition  of  * 'health  service."  A  state 
that  defined  ''services"  to  include  some  clinical  procedures  (e.g.,  open- 
heart  surgery)  as  well  as  brick-and-mortar  departments  might  find  some 
formerly-covered  projects  escaping  review,  since  some  clinical  services 
can  be  commenced  \yithout  the  need  to  incur  capital  costs. '^^ 

2.  New  Health  Services  Exceeding  an  Annual  Operating  Cost 
Minimum. — A  new  category  of  coverage  was  added  by  the  1979  amend- 
ments. Implementing  regulations  provided  for  coverage  in  the  following 
terms: 

[t]he  addition  of  a  health  service  which  is  offered  by  or  on 
behalf  of  a  health  care  facility  which  was  not  offered  by  or  on 
behalf  of  the  facility  within  the  twelve-month  period  before  the 
month  in  which  the  service  would  be  offered,  and  which  entails 
annual  operating  costs  of  at  least  the  expenditure  minimum  for 
annual  operating  costs. "'^ 

The  expenditure  minimum  for  annual  operating  cost  was  another  ex- 
penditure threshold,  set  at  $75,000.''^ 

The  purpose  of  introducing  an  annual  operating  cost  threshold  into 
certificate  of  need  coverage  of  new  services  was  to  trim  review  back  to 
those  projects  with  the  greatest  cost  implications.  Annual  operating  cost 
thresholds  for  certificate  of  need  review  had  been  under  discussion  for 
some  time  prior  to  the  1979  amendments.  In  1978,  a  NHPRDA  amend- 
ment bill  restricting  certificate  of  need  coverage  to  health  services  entailing 
annual  operating  costs  of  $50,000  or  more  and  acquisitions  of  medical 
equipment  costing  $150,000  or  more  passed  the  Senate  but  was  not  acted 
on  by  the  House. '"^^  During  this  period,  a  number  of  health  policy 
analysts  argued  that  the  institutional  health  services  sector  was  not  as 
capital-intensive  as  previously  assumed  and  that  the  overall  cost-inflating 
impact  of  capital  investment  came  more  from  the  additional  operating 
costs  generated  by  projects  than  from  the  capital  costs  of  such  projects 
themselves."*^  It  was  also  observed  that  although  high  capital  cost  projects 


'^-However,  non-capital  expenditure  service  additions  might  be  covered  as  additions 
of  services  entailing  annual  operating  costs  in  excess  of  the  expenditure  minimum  for 
annual  operating  costs.  See  infra  note  202  and  accompanying  text. 

'^'42  C.F.R.  §  123.404(a)(3)(ii)  (1981). 

'^^The  expenditure  minimum  for  annual  operating  costs  could  be  adjusted  for  inflation 
like  the  capital  expenditure  threshold.  If  a  state  made  full  use  of  the  adjustment  and 
increased  its  annual  operating  cost  threshold  to  the  elevated  level  authorized  by  1981 
NHPRDA  amendments,  its  current  expenditure  minimum  for  annual  operating  costs  would 
be  $306,750. 

'^^S.  2410,  95th  Cong.,  2d  Sess.  (1978). 

'^''See,  e.g.,  D.  Schneider,  The  Relationship  Between  Capital  and  Operating 
Costs  in  Hospitals:  Implications  for  Regulatory  Control  8-12  (Rennsalaer  Polytechnic 
Inst.,  Final  Report  1981)  (estimates  that  six  percent  of  hospital  costs  were  attributable  to 
capital  costs). 


1986]  CERTIFICATE  OF  NEED  1053 


were  usually  associated  with  high  operating  costs,  some  projects  and 
services  (e.g.,  renal  dialysis  stations)  required  low  initial  investment,  but 
generated  high  costs  of  operation.''*^  This  work  suggested  that  it  might 
be  appropriate  to  substitute  an  annual  operating  cost  threshold  for  the 
capital  expenditure  threshold  (or  to  retain  a  high  threshold  only  for 
non-service-related  capital  expenditures  large  enough  to  have  a  cost  impact 
on  their  own)."*^  The  coverage  provisions  in  the  1978  Senate  bill  seem 
to  have  adopted  this  approach.  Unfortunately,  the  1979  amendments  did 
not.  Although  they  introduced  an  annual  operating  cost  threshold  for 
new  services,  they  retained  coverage  of  any  service  addition  associated 
with  a  capital  expenditure  in  any  amount.  Continued  coverage  of  service 
additions  associated  with  any  capital  expenditure  probably  rendered  the 
annual  operating  cost  threshold  relatively  unimportant,  because  most 
service  additions  require  some  capital  expenditure  and  consequently  are 
covered  regardless  of  operating  cost. 

3.  Major  Medical  Equipment. — The  1979  amendments  introduced 
another  new  element  of  coverage:  acquisition  by  any  person  of  major 
medical  equipment  costing  in  excess  of  $150,000.  Equipment  not  owned 
by  or  located  in  a  health  care  facility  was  excluded  unless:  (1)  the  state's 
SHPDA  found,  after  notice  from  the  person  acquiring  the  equipment, 
that  it  would  be  used  to  provide  services  for  inpatients  of  a  hospital; 
or  (2)  prior  to  September  30,  1982,  the  state  certificate  of  need  program 
provided  for  coverage  of  such  equipment. '^"^ 

Coverage  of  major  medical  equipment  was  adopted  to  prevent  what 
was  seen  as  a  major  gap  in  coverage  giving  rise  to  widespread  evasion 
of  certificate  of  need  laws.  At  about  the  same  time  as  NHPRDA  was 
adopted,  several  types  of  expensive  high-technology  medical  devices  ap- 
peared on  the  market.  Chief  among  these  was  the  computed  tomography 
(CT)  scanner,  a  diagnostic  radiological  machine  which  typically  cost  in 
excess  of  $300,000  to  acquire,  generated  annual  operating  costs  in  excess 
of  $250,000,  and  (though  rapidly  accepted  by  clinicians)  was  of  unproven 


'^7g^. ;  see  also  Arthur  D.  Little,  Inc.,  Development  of  an  Evaluation  Meth- 
odology FOR  Use  in  Assessing  Data  Available  to  the  Certificate  of  Need  (CON) 
AND  Health  Planning  Programs  53-95,  187-89,  and  studies  cited  at  20-22  (Final  Report 
prepared  for  Office  of  the  Ass't  Sec'y  for  Health,  U.S.  Dep't  of  Health  &  Human  Services, 
under  Contract  No.  233-79-4(X)3  (1982)). 

'^"^Alternatively,  a  very  low  capital  expenditure  threshold  and  no  annual  spending  cost 
threshold  could  be  used,  but  this  would  result  in  coverage  of  some  low  operating  cost, 
low  capital  cost  projects.  See  Cohen  &  Cohodes,  Certificate  of  Need  and  Low  Capital- 
Cost  Technology,  60  Milbank  Mem.  Fund  Q.  307,  314-15  (1982). 

'••*'42  U.S.C.  §  300m-6(e)(l)  (1982).  The  1980  regulations  specified  that  major  medical 
equipment  could  be  used  to  provide  services  to  inpatients  on  a  temporary  basis  in  the 
case  of  natural  disaster,  major  accident,  or  equipment  failure  without  undergoing  review. 
42  C.F.R.  §  123.404(a)(4)(iii)  (1981). 


1054  INDIANA  LAW  REVIEW  [Vol.  19:1025 

efficacy.'^*'  Reports  surfaced  that  hospitals  were  evading  certificate  of 
need  and  section  1122  coverage  of  such  devices  by  placing  them  in 
adjacent  non-hospital  buildings  or  vesting  their  ownership  in  persons  or 
entities  not  subject  to  review,  while  using  the  equipment  for  inpatients.'^' 
In  response,  the  Department  of  Health,  Education  and  Welfare  published 
NHPRDA  and  section  1 122  regulations  requiring  coverage  of  CT  scanning 
as  a  new  service.'"  The  Department  and  various  others  also  supported 
NHPRDA  amendments  that  would  have  covered  large  capital  projects 
in  non-institutional  settings,  including  acquisitions  of  costly  medical 
equipment.'"  However,  physician  groups  strongly  opposed  such  a  pro- 
vision on  the  ground  that  it  would  extend  certificate  of  need  review  into 
physicians'  offices,  and  argued  that  the  states  ought  to  be  given  the 
option  of  extending  coverage  to  medical  equipment  outside  the  insti- 
tutional setting.'^"*  The  provision  adopted  in  1979  represented  a  com- 
promise between  these  views. 

4.  Expedited  Review  and  Low-Priority  Project  Exceptions. — Various 
groups  testifying  before  Congress  about  the  1979  NHPRDA  amendments 
or  commenting  on  the  1980  implementing  regulations  suggested  amend- 
ments and  changes  to  streamline  certificate  of  need  review  and  exempt 
certain  classes  or  categories  of  projects.  The  leading  target  for  exemption 
was  projects  for  remodeling  and  replacement  of  obsolete  facilities  and 
equipment. '^^  Because  excess  capacity  is  one  of  the  primary  rationales 
for  adopting  certificate  of  need  statutes,  such  an  exemption  appears  self 
defeating.  By  denying  an  application  for  a  certificate  of  need  to  replace 
an  obsolete  facility  or  equipment,  SHPDA's  can  exercise  a  ''de  facto'' 
decertification  power  over  existing  excess  capacity  in  the  industry. '^^  The 


""American  Hosp.  Ass'n,  CT  Scanners:  A  Technical  Report  43,  51  (1977).  See 
generally  U.S.  Cong.,  Ofhce  of  Technology  Assessment,  Policy  Implications  of  the 
Computed  Tomography  (CT)  Scanner  (1978). 

'"See  Health  Planning  and  Resources  Development  Amendments  of  1979:  Hearings 
on  H.R.  3041  and  3167  Before  the  Subcomm.  on  Health  and  the  Environment  of  the 
House  Comm.  on  Interstate  and  Foreign  Commerce,  96th  Cong.,  1st  Sess.  521  (1979) 
(testimony  of  Russell  Johan,  Exec.  Dir.,  Southeastern  Wis.  Health  Systems  Agency) 
($750,000  CT  scanner  reportedly  installed  by  physician  group  in  old  hamburger  stand). 

'^-42  C.F.R.  §§   100.103(a)(2)(iv),   123.404(a)(5)  (1979)  (amended   1981). 

^^^ Health  Planning  Amendments  of  1978:  Hearings  on  S.  2410  Before  the  Subcomm. 
on  Health  and  Scientific  Research  of  the  Senate  Comm.  on  Human  Resources,  95th  Cong., 
2d  Sess.   128,   134  (1978)  (statement  of  Hale  Champion,  Secretary  of  HEW). 

'^'Health  Planning  Amendments  of  1978,  S.  Rep.  845  (to  accompany  S.  2410),  95th 
Cong.,  2d  Sess.   188-89  (1978). 

'"Exemption  or  streamlined  review  was  not  a  new  idea.  The  California  certificate  of 
need  program  had  for  several  years  provided  a  broad  exemption  for  projects  to  remodel 
or  replace  facilities  or  equipment  in  existence  at  the  time  the  state's  certificate  of  need 
program  was  adopted.  Cal.  Health  &  Safety  Code  §  437.13  (West  1976)  (repealed  1984). 
In  addition,  the  Department  of  Health,  Education  and  Welfare  had  advised  states  in  1977 
of  the  option  of  "expedited  review"  of  projects.  See  42  Fed.  Reg.  4007,  4009  (1977). 

'"'See  Kopit,  Krill  &  Bonnie,  Hospital  Decertification:  Legitimate  Regulation  or  a 
Taking  of  Private  Property?,   1978  Utah  L.  Rev.   179. 


1986]  CERTIFICATE  OF  NEED  1055 

effect  of  placing  an  exemption  in  a  certificate  of  need  law  is  to  forgo 
the  opportunity  to  close  down  existing  excess  capacity  and  to  limit  the 
program's  impact  to  new  and  expanded  services.  However,  hospital  decer- 
tification, whether  accompHshed  directly  or  indirectly  through  denial  of 
remodeling  and  replacement  project  applications,  usually  encounters  power- 
ful political  opposition. '^^  In  addition,  generally  lower  costs  of  remodel- 
ing and  replacement,  as  opposed  to  new  services,  and  stable  or  increasing 
patient  populations  mean  that  such  projects  are  seldom  turned  down  on 
their  merits  by  planning  agencies. '^^ 

The  1979  NHPRDA  amendments  did  not  adopt  a  remodeling  and 
replacement  exemption,  but  they  did  take  a  step  in  that  direction  by 
authorizing  a  form  of  limited  review  of  certain  replacement  and  high 
priority  projects.  The  statute  and  regulations  provided  that  capital  ex- 
penditures (1)  to  eliminate  or  prevent  imminent  safety  hazards  (as  defined 
by  federal,  state,  or  local  fire,  building,  or  life  safety  codes  and  reg- 
ulations); (2)  to  comply  with  state  licensure  standards;  and  (3)  to  comply 
with  the  accreditation  standards  necessary  for  Medicare  or  Medicaid 
reimbursement  should  be  approved  unless  the  state  agency  found  that 
the  facility  or  service  for  which  the  capital  expenditure  was  proposed 
was  unneeded  or  that  the  obligation  of  the  capital  expenditure  for  the 
project  was  inconsistent  with  the  state  health  plan.'-*^ 

D.     Continued  Implementation  of  NHPRDA 

Adoption  of  state  certificate  of  need  statutes  in  response  to  NHPRDA 
continued  steadily  after  the  passage  of  the  1979  amendments.  By  1980, 
forty-seven  states  and  the  District  of  Columbia  had  certificate  of  need 
programs.  Only  Louisiana,  Idaho,  and  Indiana  lacked  certificate  of  need 
statutes,  and  all  three  had  1122  programs.  By  the  end  of  1980,  Idaho 
and  Indiana  had  adopted  certificate  of  need  laws.'^"  Several  states  ter- 
minated their  1122  agreements  after  they  adopted  certificate  of  need 
laws.'^'  This  change  was  due  in  part  to  the  perception  that  the  presence 
of  a  certificate  of  need  program  rendered  section  1122  superfluous.'^^ 
Additionally,  the  Department  of  Health  and  Human  Services  did  not 
provide  any  additional  funding  for  the  cost  of  administering  both  cer- 
tificate of  need  and  1122  programs.'" 

'"'See,  e.g..  Carpenter  &  Paul-Shaheen,  Implementing  Regulatory  Reform:  The  Saga 
of  Michigan's  Debedding  Experiment,  9  J.  Health  Pol.  Pol'y  &  L.  453  (1984). 

'""See  infra  note  174. 

'^"42  U.S.C.  §  300m-6(c)  (Supp.  Ill   1979). 

'""American  Health  Planning  Ass'n,  Selected  Data  on  State  Health  Planning 
AND  Related  Programs  (1982). 

""Congressional  Budget  Office,  Health  Planning:  Issues  for  Reauthorization 
14-15  (1982). 

"-S.  Rep.  No.  96,  96th  Cong.,  1st  Sess.  43,  reprinted  in  1979  U.S.  Code  Cong.  & 
Admin.  News  1306,   1348. 

"''See  44  Fed.  Reg.  44,345  (1979). 


1056  INDIANA  LAW  REVIEW  [Vol.  19:1025 

E.     Recent  NHPRDA  Amendments 

Since  the  1979  amendments,  NHPRDA  has  not  undergone  major 
revision.  However,  the  relationship  between  NHPRDA's  certificate  of 
need  requirements  and  state  certificate  of  need  programs  has  been  drast- 
ically altered,  and  NHPRDA's  coverage  provisions  themselves  have  been 
modified. 

The  provision  of  NHPRDA  authorizing  appropriations  for  funding 
HSA's  and  SHPDA's  expired  September  30,  1982.'^  From  that  time 
until  the  present.  Congress  has  temporarily  continued  the  program  in 
annual  appropriations  bills. '^^  Each  year,  Congress  has  appended  a  rider 
to  the  appropriations  bills  forbidding  the  Secretary  of  Health  and  Human 
Services  from  terminating  or  penalizing  a  state  that  fails  to  have  a 
certificate  of  need  program  complying  with  NHPRDA  during  the  fiscal 
year  covered  by  the  bill.'^^  The  effect  of  these  provisions  has  been  to 
release  states  from  the  risk  of  losing  federal  funds  by  amending  their 
certificate  of  need  statutes  to  deviate  from  NHPRDA. '^^  In  the  wake 
of  these  provisions,  numerous  states  have  adopted  certificate  of  need 
coverage  provisions  differing  sharply  from  NHPRDA. 

The  NHPRDA  coverage  provisions  themselves  also  have  been  sub- 
stantially cut  back.  The  Health  Programs  Extension  Act  of  1980  added 
a  permissive  exemption  from  certificate  of  need  coverage  for  projects 
* 'solely  for  research.  ""^*^  The  NHPRDA  exemption  applies  to  projects 
solely  for  research  that  would  not  affect  patient  charges  or  substantially 
change  bed  capacity  or  medical  and  other  patient  care  services  of  the 
facility  (either  initially  or  after  the  project  has  been  developed). '^'^ 


"^42  U.S.C.  §  300n-6  (1982). 

"•■Departments  of  Labor,  Health  and  Human  Services  and  Education  and  Related 
Agencies  Appropriations  Act,  1986,  Pub.  L.  No.  99-178,  Title  II,  99  Stat.  1102,  1109  (1985); 
Continuing  Appropriations  1985,  Pub.  L.  No.  98-473,  §  315(k),  98  Stat.  1837,  1963  (1984); 
Continuing  Resolution  1984,  Pub.  L.  No.  98-151,  §  101(c),  97  Stat.  964,  972  (1983);  Conti- 
nuing Appropriations  1984,  Pub.  L.  No.  98-107,  §  101(f),  97  Stat.  733,  736  (1983);  Further 
Continuing  Appropriations  1983,  Pub.  L.  No.  97-377,  §  101(e)(2),  96  Stat.  1830,  1905-6 
(1982);  Continuing  Appropriations  Fiscal  Year  1983,  Pub.  L.  No.  97-276,  §  133,  96  Stat. 
1186,   1197  (1982). 

"*E.g.,  Further  Continuing  Appropriations  for  the  Fiscal  Year  1986,  §  124,  99  Stat. 
1185,  1320  (1985)  ("no  penalty  shall  be  applied  nor  any  State  or  agency  agreement 
terminated  pursuant  to  sections  1512,  1515,  or  1521  of  the  Public  Health  Service  Act 
during  fiscal  year  1986.") 

"•'A  court  has  also  held  that  the  appropriations  bills'  riders  implicitly  repeal  NHPRDA 
certificate  of  need  requirements,  rendering  them  unenforceable  by  third  parties  (who  are 
not  specifically  barred  from  enforcement  actions  by  the  express  terms  of  the  riders). 
Harrisburg  Hosp.  v.  Thornburgh,  616  F.  Supp.  699  (M.D.  Pa.  1985),  aff'd  mem.,  791 
F.2d  918  (3d  Cir.  1986). 

''Tub.  L.  No.  96-538,  §  307,  94  Stat.  3183,  3191  (1980)  (codified  at  42  U.S.C. 
§  300m-6(h)  (1982)). 

"""42  U.S.C.  §  300m-6(h)(1982).  Proposals  to  grant  special  treatment  for  research  and 
education  projects  had  a  long  history.   See  38  Fed.   Reg.   31,380  (1973)  in  which  the 


1986]  CERTIFICATE  OF  NEED  1057 

In  the  Omnibus  Budget  Reconciliation  Act  of  1981,  the  NHPRDA 
capital  expenditure  threshold  was  increased  to  $600,000,  the  expenditure 
minimum  for  major  medical  equipment  was  increased  to  $400,000,  and 
the  expenditure  minimum  for  annual  operating  costs  was  raised  to 
$250,000.'^"  The  purpose  of  these  changes  was  to  * 'promote  focusing 
the  resources  available  for  certificate  of  need  reviews  on  the  most  ex- 
pensive and  future  cost-generating  new  investments  in  medical  care.'"^' 

High  inflation  during  this  period  clearly  necessitated  some  threshold 
increases  simply  to  retain  coverage  at  the  originally  adopted  level.  A 
$150,000  capital  expenditure  for  construction  in  1977  would  have  cost 
in  excess  of  $232,000  by  1982.'^^  Furthermore,  many  state  CON  programs 
were  experiencing  great  problems  keeping  up  with  their  review  work- 
load.'^^  Low  thresholds  meant  agencies  were  bogged  down  in  review  of 
routine  replacement  expenditures  and  expenditures  for  projects,  such  as 
acquisition  of  computerized  medical  information  systems,  telephone  sys- 
tems, and  parking  structures,  that  were  unrelated  to  patient  care.  Ap- 
proval rates  for  such  projects  tended  to  be  very  high.'^'* 

In  addition,  there  was  increasing  recognition  at  this  time  that  se- 
lectively raising  thresholds  would  focus  certificate  of  need  review  on  the 
most  costly   and   controversial   projects.    One   study   indicated  that   by 


Secretary  rejected  a  proposal  to  give  special  consideration  to  health-related  teaching  and 
research  capital  expenditures  under  the  section  1122  program.  In  1978,  Massachusetts 
added  a  provision  to  its  certificate  of  need  statute  exempting  capital  expenditures  and 
substantial  changes  in  services  if  they  were  essential  to  the  conduct  of  research  in  basic 
bio-medical  or  health  care  delivery  areas  or  essential  to  the  training  of  health  care  personnel, 
and  would  not  increase  capacity  or  charges.  Mass.  Gen.  Laws  Ann.  ch.  Ill,  §  25(c) 
(West  1978)  (amended  1980,  1981).  With  the  Massachusetts  law  as  a  prototype,  in  1979 
the  Association  of  American  Medical  Colleges  recommended  an  amendment  to  NHPRDA 
which  would  have  exempted  from  CON  review  medical  education  and  research  projects 
with  only  minor  health  service  impacts.  Health  Planning  Amendments  of  1979:  Hearing 
on  S.  594  Before  the  Subcomm.  on  Health  and  Scientific  Research  of  the  Senate  Comm. 
on  Labor  and  Human  Resources,  96th  Cong.,  1st  Sess.  464  (1979)  (statement  of  John 
A.D.  Cooper,  President,  Association  of  American  Medical  Colleges). 

'^"Pub.  L.  No.  97-35,  §§  936(a)(l)-(3),  95  Stat.  572  (1981)  (codified  as  amended  at 
42  U.S.C.  §  3(X)n(5),(6),(7)  (1982)). 

'^'Omnibus  Budget  Reconciliation  Act  of  1981,  H.R.  Rep.  No.  208,  97th  Cong.,  2d 
Sess.  823  (1981). 

^''^See  U.S.  Dep't  of  Commerce,  Construction  Review  754  (December  1982);  U.S. 
Dep't  of  Commerce,  Statistical  Abstract  of  the  United  States:  1981  754  (1981).  The 
section  1122  threshold  was  even  further  out  of  adjustment  than  the  NHPRDA  thresholds. 
A  $100,000  construction  expenditure  in  1973  would  have  cost  $225,000  by  1982.  Id. 

'^■The  volume  of  certificate  of  need  applications  had  increased  while  agency  funding 
had  decreased.  See  supra  note  8;  Office  of  Health  Planning,  U.S.  Dep't  of  Health 
&  Human  Services,  Status  Report  on  State  Certificate  of  Need  Programs  3  (1985). 

"^For  example,  from  1973-82  the  certificate  of  need  application  approval  rates  in 
Florida  for  equipment  replacement  and  expansion/renovation  (not  involving  new  services) 
were  99.4  percent  and  98.1  percent  respectively,  while  the  approval  rate  for  all  other 
projects  was  81.4  percent.  Office  of  Health  Planning,  Fla.  Dep't  of  Health  & 
Rehabilitative  Services,  Annual  Report  on  Certificate  of  Need  Activity  42  (1984). 


1058  INDIANA  LAW  REVIEW  [Vol.  19:1025 

increasing  the  capital  threshold  in  New  York  from  $100,000  to  $1,000,000 
and  setting  a  $250,000  annual  operating  threshold  for  new  services,  three 
quarters  of  the  projects  reviewed  in  1979  would  have  been  exempted. 
The  remaining  projects  subject  to  review,  however,  would  account  for 
77%  of  the  capital  cost  and  over  96%  of  the  operating  cost  impU- 
cations  of  all  projects  proposed  under  the  lower  thresholds. '^^  Sim- 
ilarly, a  Department  of  Health  and  Human  Services  study  indicated  that 
almost  60%  of  the  certificate  of  need/section  1122  applications  in 
the  1979-1980  study  year  were  for  expenditures  below  $500,000.  These 
projects  accounted  for  less  than  10%  of  the  proposed  costs.  Further- 
more, approval  rates  were  higher  for  lower  cost  projects.''^  Build- 
ing on  these  studies,  a  number  of  recommendations  for  certificate  of 
need  coverage  reform  were  put  forth  at  this  time.'^^  A  common  theme 
was  the  need  to  redefine  coverage  terms  so  as  to  focus  on  high  priority 
projects.  One  study  advocated  high  capital  expenditure  thresholds  and 
an  annual  operating  cost  threshold  for  new  services.'^**  However,  it  also 
recommended  covering,  without  regard  to  operating  or  capital  cost,  those 
new  services  or  items  of  equipment  for  which  quality  of  care  rationales 
for  certificate  of  need  coverage  were  strongest. '^"^  Others  recommended 
covering  specified  services  or  technologies  rather  than  using  expenditure 
or  cost  thresholds.'^"  The  threshold  increases  adopted  by  Congress  in 
the  1981  Budget  Act  did  not  exactly  follow  these  proposals."^'  Because 


'"D.  Schneider,  supra  note  146. 

"*E.  Coleman,  Volume  and  Value  of  CON/1122  Applications  (Bureau  of  Health 
Planning,  U.S.  Dep't  of  Health  &  Human  Services,  Program  Information  Note  81-7 
(1981)). 

'''See,  e.g.,  J.  Howell,  Regulating  Hospital  Capital  Investment:  The  Experience 
OF  Massachusetts  (Nat'l  Center  for  Health  Serv.  Res.,  Research  Summary  Series  (1981)); 
D.  Schneider,  supra  note  146;  Cohen  &  Cohodes,  supra  note  148. 

'"*D.  Schneider,  supra  note  146,  at   11,   15-16. 

''-'Id. 

""'Cohen  &  Cohodes,  supra  note  148;  see  also  J.  Howell,  supra  note  177,  at  21. 

"•'Threshold  levels  were  negotiable  items  in  the  political  debate  over  health  planning 
in  1981,  with  opponents  of  the  program  seeking  to  reduce  the  number  of  projects  subject 
to  review  as  much  as  possible  and  proponents  attempting  to  hold  threshold  increases  to 
the  level  necessary  to  obtain  continued  political  support  for  the  program.  Thus,  in  the 
spring  of  1981,  the  Department  of  Health  and  Human  Services  drafted  a  legislative  proposal 
to  "phase-out"  NHPRDA  which  would  have  increased  the  capital  expenditure  threshold 
to  $500,000  and  exempted  non-clinical  projects  such  as  parking  lots  and  heating  systems. 
Administration  Phase-out  Bill  Amended  Consumer  Majority  Rule,  Wash.  Rep.  on  Medicine 
AND  Health  (1981).  Starting  with  that  figure,  the  House  version  of  the  1981  Budget 
Reconciliation  Act  would  have  set  the  capital  expenditure  threshold  at  $500,000  and  doubled 
the  existing  medical  equipment  and  annual  operating  cost  thresholds  (then  set  at  $150,000 
and  $75,000)  to  $300,000  and  $150,000  respectively.  It  would  have  also  provided  for 
modest  reductions  in  federal  health  planning  funding.  Omnibus  Budget  Reconciliation  Act 
of  1981,  H.R.  Rep.  No.  158,  Vol.  2,  97th  Cong.,  1st  Sess.  383  (1981).  The  Senate  version 
of  the  Budget  Act  would  have  radically  defunded  NHPRDA.  Omnibus  Budget  Reconcilia- 


1986]  CERTIFICATE  OF  NEED  1059 

the  thresholds  were  raised  across  the  board,  they  did  not  operate  to 
select  out  specific  classes  of  projects.  In  addition,  because  the  federal 
regulations  continued  to  require  coverage  of  service  additions  associated 
with  any  capital  expenditure,  the  effect  of  the  annual  operating  cost 
threshold  increase  was  not  as  great  as  might  appear. 

F.     Section  1122  Amendments  and  the  Medicare  Prospective  Payment 

System 

Section  1122  program  coverage  had  remained  essentially  unchanged 
from  1972.  By  the  end  of  1982,  only  fifteen  states  still  had  section  1122 
agreements. '^^ 

However,  in  late  1982,  there  was  renewed  interest  in  the  1122  pro- 
gram.'^^-^  From  a  political  standpoint,  the  section  1 122  program  had  certain 
features  attractive  to  proponents  of  federally-funded  health  planning. 
Because  the  law  required  the  Department  of  Health  and  Human  Services 
to  enter  into  an  1122  agreement  with  any  state  able  and  willing  to  do 
so  and  provided  for  payment  to  states  for  the  reasonable  cost  of  running 
1122  programs,  it  seemed  to  be  less  vulnerable  than  NHPRDA  to  a 
hostile  administration  bent  on  defunding  health  planning  or  a  Congress 
unable  to  decide  whether  to  reauthorize  or  terminate  NHPRDA. 

Additionally,  because  the  consequence  of  a  negative  1 122  recommen- 
dation was  at  most  a  partial  reimbursement  denial,  not  the  denial  of  a 
permit  to  implement  a  proposed  project,  section  1122  programs  could 
legitimately  be  characterized  as  less  "regulatory"  than  state  certificate  of 
need  reviews.  The  Medicare  reimbursement  sanction  operated  as  a  finan- 
cial disincentive  to  invest,  and  projects  did  sometimes  proceed  without 
section  1122  approval.'*^  These  features  were  thought  to  make  1122  more 
palatable  to  deregulation  proponents. 

Interest  in  the  section  1 122  program  was  also  sparked  by  congressional 
consideration  at  this  time  of  fundamental  reforms  in  the  Medicare  pro- 
gram. As  part  of  a  major  social  security  bail-out  package,  Congress 
adopted  a  prospective  payment  system  for  Medicare. '^^  The  prospective 
payment  system  reimburses  most  acute  care  hospitals  participating  in 


tion  Act  of  1981,  S.  Rep.  No.  139,  97th  Cong.,  1st  Sess.  878-79  (1981).  Conference  negotia- 
tions resulted  in  restoration  of  some  federal  funds  in  return  for  increasing  each  of  the 
thresholds  proposed  in  the  House  version  by  $100,000,  resulting  in  the  current  $600,000, 
$400,000,  $250,000  configuration.  Omnibus  Budget  Reconciliation  Act  of  1981,  H.R.  Rep. 
208,  97th  Cong.,  2d  Sess.  231  (1981). 

"*-Lewin  &  Assocs.,  supra  note  73,  at   14. 

"'See  American  Health  Planning  Ass'n,  1122  May  Rise  Again,  IV  Today  in  Health 
Planning,  No.  8  (1982). 

'"'Lewin  &  Assocs.,  supra  note  73,  at  5. 

'-^Social  Security  Amendments  of  1983,  Title  VI,  97  Stat.  149-152  (codified  at  42  U.S.C. 
§  1395WW  (1983)). 


1060  INDIANA  LAW  REVIEW  [Vol.  19:1025 

Medicare  for  acute  inpatient  services  on  the  basis  of  a  fixed  amount 
per  patient  admission  or  '*case,"  based  on  average  costs  in  a  base  year 
for  comparable  classes  of  hospitals,  adjusted  for  each  hospital's  mix  of 
high  and  low  cost  cases  (represented  by  diagnostic  clusters),  and  capped 
by  a  '^budget  neutrality"  ceiling  under  which  total  system  reimbursement 
to  hospitals  may  not  exceed  the  amount  that  would  have  been  paid 
under  earlier  payment  systems. '^^  The  prospective  payment  system  was 
intended  to  alter  the  underlying  financial  incentives  in  Medicare,  en- 
couraging above-average  cost  hospitals  to  economize. 

Congress  was  unable  to  decide  how  to  incorporate  capital  costs  into 
the  per  case  payment  formula. '^^  Consequently,  incurred  cost  reimburse- 
ment for  acute  inpatient  hospital  capital  costs  (as  well  as  capital  costs 
incurred  by  other  institutional  Medicare  providers  not  covered  by  pro- 
spective payment)  was  retained.  However,  Congress  also  provided  that 
if  it  were  unable  to  devise  a  method  for  incorporating  capital  costs  into 
the  per  case  payments  by  October  1,  1986,  Medicare  would  cease  to 
pay  for  capital  costs  associated  with  new  acute  inpatient  hospital  capital 
expenditures  in  a  state  after  that  date  unless  the  state  had  a  section 
1122  agreement,  and  under  the  agreement  the  state  had  recommended 
approval  of  the  capital  expenditure  associated  with  the  project. '^^ 

The  effect  of  this  provision  is  to  make  section  1122  participation 
effectively  mandatory  in  all  states  on  October  1,  1986,  unless  Congress 
enacts  contrary  legislation.'^*^  By  this  provision,  Congress  sought  to  assure 


'''Id.  See  generally  1  Medicare  &  Medicaid  Guide  (CCH)  It  4200-4395  (prospective 
payment  regulations  updated  to  January,   1986). 

"*'It  considered  using  a  simple  percentage  increase  in  the  amount  paid  to  each 
participating  hospital  for  non-capital  costs.  There  were  several  difficulties  with  this  "capital 
add-on"  approach.  On  the  average,  the  proportion  of  individual  hospital  total  costs  that 
is  attributable  to  the  cost  of  capital  plant  and  equipment  (i.e.,  interest,  depreciation)  is 
about  seven  percent.  Anderson  &  Ginsberg,  Prospective  Capital  Payments  to  Hospitals, 
2  Health  Aff.  52  (1983).  However,  the  actual  proportion  varies  widely  from  one  hospital 
to  the  next  on  the  basis  of  factors  unrelated  to  individual  institutional  efficiency  or  prudent 
business  strategy,  including  regional  location,  hospital  type  and  ownership,  and  age  of 
capital  plant.  A  "seven  percent  add-on"  to  the  per-case  payment  rates  would  tend  to 
penalize  some  high  capital-cost  facilities  on  the  basis  of  these  unrelated  factors  and  over- 
reimburse  some  low-cost  facilities.  A  more  generous  add-on  would  avoid  the  penalty 
problem,  but  increase  over-reimbursement  and  raise  total  Medicare  capital  costs  over 
current  levels.  Both  alternatives  violate  the  guiding  principles  of  the  prospective  payment 
system:  rational  economic  incentives  to  hospital  efficiency  and  "budget  neutrality."  This 
dilemma  prompted  Congress'  indecision.  Id. 

"*'*42  U.S.C.  §   1395ww(g)(l)  (1983). 

""'Technically,  the  provision  does  not  require  states  to  adopt  section  1122  programs. 
However,  the  penalty  that  hospitals  would  suffer  in  states  without  section  1122  programs 
would  be  so  great  that  it  is  unlikely  any  state  would  opt  not  to  participate  in  1122. 
Compare  the  NHPRDA  penalty  for  noncompliance  described  supra  in  text  accompanying 
note  81. 


1986]  CERTIFICATE  OF  NEED  1061 

that  some  mechanism  for  control  of  capital  investment  by  health  care 
facilities,  either  in  the  form  of  a  formula-derived  payment  added  to  or 
otherwise  incorporated  into  the  per  case  payment,  or  continued  payment 
at  cost  subject  to  review  and  approval  by  a  planning  agency,  would 
always  be  in  place.  Several  proposals  have  been  advanced  for  incor- 
porating capital  costs  into  the  prospective  payment  system,  both  with 
and  without  mandated  planning  agency  review.'*^' 

Finally,  Congress  also  amended  the  section  1 122  expenditure  threshold 
from  $100,000  to  $600,000,  bringing  it  into  line  with  the  NHPRDA 
threshold."^' 

V.  Current  State  Certificate  of  Need  and  Section  1122 

Programs 

A.     Level  of  Participation  in  Certificate  of  Need  and  Section  1122 

Table  1  identifies  the  present  level  of  state  participation  in  certificate 
of  need  or  section  1122  programs.  Forty-two  states  and  the  District  of 
Columbia  have  certificate  of  need  laws.  Seven  states  have  repealed 
certificate  of  need  statutes  since  1983:  Arizona,  Idaho,  Kansas,  New 
Mexico,  Minnesota,  Texas,  and  Utah.  The  other  state  presently  without 
certificate  of  need,  Louisiana,  has  never  adopted  a  statute. 

Fifteen  states  presently  conduct  section  1122  programs.  Four  (Idaho, 
New  Mexico,  Minnesota,  and  Louisiana)  do  not  have  certificate  of  need 
statutes.  Idaho  entered  into  its  current  section  1122  agreement  when  it 
repealed  its  certificate  of  need  law  in  1983.  New  Mexico  and  Minnesota 
retained  their  programs  when  they  allowed  their  certificate  of  need  statutes 
to  lapse. 

Minnesota  and  Kansas  adopted  statutes  imposing  moratoria  on  new 
hospital  construction,  bed  capacity  increases,  and  bed  relocations  until 
July  1,  1987, •''2  and  June  30,  1986,'^^  respectively,  at  the  time  their 
certificate  of  need  laws  expired.  In  effect,  their  moratoria  reestablished 
capital  expenditure  regulation,  with  limited  coverage  but  criteria  requiring 
automatic  denial. 

Thus,  with  the  exception  of  Arizona,  Utah,  and  Texas,  at  the 
beginning  of  1986,  every  state  had  some  form  of  health  facility  capital 
expenditure  regulation  such  as  a  certificate  of  need  program,  a  section 
1122  agreement,  a  moratorium  on  new  hospital  projects,  or  some  com- 
bination thereof. 


''"'See  Anderson  &  Ginsberg,  Medicare  Payment  and  Hospital  Capital:  Future  Policy 
Options,  3  Health  Aff.  35,  40-43  (1984). 
'•^'42  U.S.C.  §  1320a-l(g)  (1983). 
"'-1984  Minn.  Sess.  Law  Serv.,  ch.  654,  §  57  (West). 
"'M985  Kan.  Sess.  Laws  970. 


1062  INDIANA  LAW  REVIEW  [Vol.  19:1025 

B.     Coverage  of  Health  Care  Facilities 

Table  2  identifies  the  facilities  subject  to  review  in  each  state  with 
a  certificate  of  need  or  section  1122  program. ''^^  Hospitals,  skilled  nursing 
facilities,  and  intermediate  care  facilities  are  subject  to  review  in  every  state 
when  covered  transactions  are  undertaken  by  them  or  on  their  behalf.  This 
unanimity  is  probably  due  to  the  fact  that  the  causes  of  health  care 
market  failure  justifying  certificate  of  need  regulation — generous  insurance 
coverage,  reimbursement  incentives  to  excess  investment,  organizational 
insulation  from  cost  increases — are  most  prevalent  for  services  provided 
in  these  settings. '^^  In  addition,  these  facilities  all  have  been  required  to 
be  covered  by  either  NHPRDA  or  section  1122  for  several  years. 

Somewhat  surprisingly,  almost  all  jurisdictions  cover  ambulatory 
surgical  centers.  There  is  accumulating  evidence  supporting  the  intuitively 
plausible  idea  that  ambulatory  surge;ry  offers  a  less  expensive  substitute 
for  less  complicated  inpatient  surgery,  and  on  that  ground  one  might 
expect  states  to  exclude  it  from  certificate  of  need  in  order  to  encourage 
its  spread. '"^^  However,  the  increase  in  ambulatory  surgery  facilities  that 


''^Appendix  A  contains  definitions,  notes,  and  state  supplementary  comments  for 
Table  2,  organized  by  state.  When  the  notation  "N"  appears  in  Table  2,  the  state-by- 
state  comments  in  Appendix  A  contain  explanatory  information. 

'"The  reasons  for  hospital  and  nursing  home  coverage  are  probably  somewhat  different. 
The  level  of  private  insurance  or  governmental  third  party  payment  for  hospital  care  is 
very  high  (86*^0  of  total  expenditures  for  hospital  care)  while  consumer  out-of-pocket 
payment  for  nursing  home  care  is  high  (44*^0  of  total  expenditures  for  nursing  home  care). 
High  levels  of  patient  cost-sharing  for  nursing  home  services  weaken  the  market-failure 
argument  for  certificate  of  need  coverage.  However,  the  share  of  expenditures  for  nursing 
home  care  not  paid  out-of-pocket  is  borne  disproportionately  by  public  benefit  and  insurance 
programs  (a  large  contributor  to  which  are  state  Medicaid  programs),  not  private  health 
insurance.  Gibson,  Waldo  &  Levit,  National  Health  Expenditures  1982,  5  Health  Care 
Fin.  Rev.  1,  7  (1983).  Consequently,  coverage  of  nursing  facilities  can  probably  be  attributed 
to  the  use  of  certificate  of  need  programs  to  limit  the  availability  of  such  facilities  to 
Medicaid  beneficiaries  for  the  purpose  of  constraining  Medicaid  costs  and  encouraging 
patients  to  seek  less  costly,  non-institutional  forms  of  care.  Thus,  it  would  be  no  coincidence 
that  Arizona,  whose  Medicaid  program  (the  Arizona  Health  Care  Cost  Containment  System) 
is  the  only  one  not  providing  nursing  home  benefits,  was  the  only  state  in  recent  memory 
that  did  not  cover  nursing  facilities  under  its  (recently  repealed)  certificate  of  need  law. 
See  Ariz.  Rev.  Stat.  Ann.  §  36-433  (Supp.  1975)  (repealed  1985).  Similarly  indicative 
of  the  Medicaid  budget  control  rationale  for  certificate  of  need,  Indiana's  statute  covers 
only  those  skilled  nursing  and  intermediate  care  facilities  that  participate  in  Medicaid,  and 
North  Carolina,  Ohio,  and  Virginia  have  partial  exemptions  from  certificate  of  need  review 
for  nursing  beds  in  retirement  communities  that  do  not  participate  in  Medicaid,  presumably 
on  the  grounds  that  the  high  levels  of  out-of-pocket  payment  for  non-Medicaid  nursing 
homes  mean  a  price-sensitive  consuming  public.  Ind.  Code  Ann.  §  16-1-3. 3-l(a)  (West 
Supp.  1985);  1985  N.C.  Adv.  Legis.  Serv.  ch.  445  (to  be  codified  at  N.C.  Gen.  Stat. 
§  131E-183(c));  1985  Ohio  Legis.  Bull,  file  23,  §  1  (Anderson)  (to  be  codified  at  Ohio 
Rev.  Code  Ann.  §  3702.53  (I));  Va.  Code  §  32.1-102.3:1  (1985). 

'"'See  generally  W.  Valentine  &  B.  Palmer,  Ambulatory  Surgery  Services  15-17 
(Alpha  Center  Monographs:  Methodological  Note  No.  5)  (Office  of  Health  Planning,  U.S. 
Dep't  of  Health  &  Human  Services,   1984)  and  studies  cited  therein. 


1986]  CERTIFICATE  OF  NEED  1063 

would  result  from  an  exemption  might  have  the  undesirable  short-term 
effect  of  increasing  excess  inpatient  surgical  capacity  and  reducing  op- 
portunities for  hospital  internal  subsidization  of  services  such  as  free 
care  surgery  revenues. '"^^  The  widespread  coverage  of  ambulatory  surgery 
centers  probably  reflects  concerns  about  imperfections  in  the  ambulatory 
surgery  market,  the  impact  of  such  centers  on  hospital  utilization,  quality 
issues,  and  simply  the  fact  that  both  NHPRDA  and  1122  mandate 
ambulatory  surgery  coverage. 

Most  states  have  essentially  exempted  health  maintenance  organi- 
zations (HMO's)  and  health  care  facilities  controlled  by  health  main- 
tenance organizations  from  certificate  of  need  by  adopting  the  NHPRDA 
exemption  provisions  or  similar  language.  A  few  have  taken  the  principle 
behind  the  NHPRDA  exemption  a  good  deal  further.  For  example, 
California  exempts  any  health  care  facility  project  other  than  a  skilled 
nursing  bed  addition  if  over  twenty-five  percent  of  the  patients  served 
by  the  project  are  covered  by  prepaid  health  care.'*^*^  It  thus  exempts 
facilities  not  actually  controlled  by  health  maintenance  organizations  if 
they  are  subjected  to  the  efficiency  incentives  of  health  maintenance 
organizations  or  other  forms  of  prepayment. 

Coverage  of  other  facilities  is  much  more  varied.  Twenty  states  cover 
medically  oriented  residential  care  facilities.  The  market  failure  rationale 
for  their  coverage  is  weak,  because  by  definition  such  institutions  provide 
only  minimal  medical  care  services.  However,  such  institutions  are  often 
operated  by  government  units  or  reimbursed  almost  entirely  by  Medicaid 
and  social  service  agencies,  and  certificate  of  need  review  may  be  simply 
a  vehicle  for  governmental  planning  and  budgeting  for  the  services  these 
facilities  provide. '"^"^  A  similar  rationale  probably  supports  the  remarkably 
widespread  (thirty-one  states)  coverage  of  home  health  agencies. 

Fifteen  states  cover  all  organized  ambulatory  care  facilities.  Several 
others  cover  one  or  more  specific  types  of  ambulatory  facility.  Fifteen 
cover  hospices.  In  each  of  these  instances,  states  have  consciously  decided 


''''Meritorious  cream-skimmers  like  ambulatory  surgery  facilities  create  a  perpetual 
dilemma  for  health  planning  agencies,  exacerbated  by  contradictory  certificate  of  need 
criteria  for  evaluating  such  proposals.  Cf.  Collier  Med.  Center,  Inc.  v.  Department  of 
Health  &  Rehabilitative  Servs.,  462  So.  2d  83,  85  (Fla.  Dist.  Ct.  App.  1985)  (upholding 
the  denial  of  a  certificate  of  need  for  new  for-profit  hospital  construction  on  the  skimmer- 
favoring  ground  that  an  existing  outpatient  facility  provided  a  less  costly  alternative  and 
the  skimmer-opposing  ground  that  an  existing  public  hospital  would  incur  a  revenue  loss 
from  the  proposed  facility's  diversion  of  paying  patients). 

'""Cal.  Health  &  Safety  Code  §  437.10(g)  (Deering  Supp.  1986).  Oregon  has  recently 
adopted  a  potentially  even  broader  provision.  It  exempts  hospitals  if  sixty  percent  of  their 
inpatient  revenue  is  received  from  payers  employing  prospectively-determined  forms  of 
reimbursement.  1985  Or.  Laws,  ch.  747,  §  35  (to  be  codified  at  Or.  Rev.  Stat.  §  442). 

''^Whether  the  certificate  of  need  administrative  adjudicatory  process  is  an  efficient 
means  of  doing  so  is  questionable.  A  few  states  have  amended  their  statutes  recently  to 
exempt  government-run  health  care  facilities.  See,  e.g..  Mo.  Ann.  Stat.  §  197.315(18) 
(Vernon  Supp.  1985);  Mont.  Code  Ann.  §  50-5-309(1  )(b)  (1985). 


1064  INDIANA  LAW  REVIEW  [Vol.  19:1025 

to  cover  health  facilities  that  are  not  covered  under  NHPRDA  and  that 
the  Department  of  Heahh  and  Human  Services  has  expressly  chosen  not 
to  cover. 

The  extent  to  which  these  institutions  actually  undergo  certificate  of 
need  review  depends  considerably  on  the  project  coverage  provisions  of 
their  state's  certificate  of  need  law.  Most  of  the  states  that  cover  am- 
bulatory facilities  have  sufficiently  high  capital  expenditure  and  major 
medical  equipment  thresholds  that  the  facilities'  typically  modest  capital 
acquisitions  in  these  areas  would  escape  review.  However,  most  of  the 
states  that  cover  ambulatory  facilities  would  subject  the  initial  estab- 
lishment or  construction  of  such  facilities  to  review. 

The  reasons  states  cover  ambulatory  health  care  facilities  are  not 
immediately  apparent.  As  with  ambulatory  surgery  centers,  coverage  is 
probably  justified  by  concern  for  impact  on  hospital  use  and  cream- 
skimming  or  by  concern  for  access  and  quality. ^''^^ 

1.  Coverage  of  Capital  and  Other  Projects. — The  states  have  made 
major  changes  in  project  coverage.  Going  beyond  recent  NHPRDA 
amendments  and  essentially  implementing  the  recommendations  of  policy 
analysts  in  the  field,  they  have  de-emphasized  review  of  projects  not 
directly  related  to  patient  care  and  have  focused  on  large  expenditures 
and  additions  of  new  technology  and  services.  Table  3  identifies  the 
capital  expenditures  and  other  projects  subject  to  review  under  the  states' 
certificate  of  need  and  section  1122  programs.^"' 

Project  coverage  varies  widely  among  the  states.  However,  some  of 
the  variation  may  be  more  apparent  than  real.  First,  states  may  simply 
choose  different  words  to  cover  essentially  the  same  transactions.^"^  For 
example,  there  is  probably  no  difference  in  reviewability  of  bed  capacity 
increases  between  a  state  that  covers  capital  expenditures  for  bed  capacity 
increases  and  a  state  that  covers  bed  capacity  increases  without  regard 
to  expenditure,  because  a  bed  capacity  increase  almost  invariably  involves 
a  capital  expenditure  (for  the  beds  themselves  if  nothing  else).  Second, 
several  states  have  redundant  project  coverage  provisions.  Covering  both 
service  additions  associated  with  a  capital  expenditure  and  service  ad- 
ditions regardless  of  capital  or  operating  cost  is  an  example.  If  these 
kinds  of  variations  are  set  aside,  it  is  apparent  from  Table  3  that  most 


-""Stated  rationales  for  ambulatory  care  facility  coverage  are  extremely  difficult  to 
find.  But  see  Statewide  Health  Coordinating  Council,  State  of  Michigan,  2  Michigan 
State  Health  Plan  1983-1987,  at  25-26,  28  (1983),  which  justifies  coverage  of  outpatient 
facilities  and  public  health  centers  on  quality  of  care  and  geographical  accessibility  grounds. 

-"'Appendix  A  contains  definitions,  notes,  and  state-by-state  supplementary  comments 
for  Table  3,  organized  by  state.  When  the  notation  "N"  appears  in  Table  3,  the  state- 
by-state  comments  in  Appendix  A  contain  explanatory  information. 

-"-Some  of  this  may  be  accounted  for  by  the  fact  that  states  drafted  their  certificate 
of  need  statutes  and  regulations  at  differing  times  and  attempted  to  comply  with  the 
version  of  federal  certificate  of  need  law  and  regulations  then  in  effect. 


1986]  CERTIFICATE  OF  NEED  1065 

States  with  certificate  of  need  and/or  section  1122  programs  cover  general- 
purpose  capital  expenditures  incurred  by  or  on  behalf  of  health  care 
facilities,  bed-related  changes  of  various  types,  additions  of  new  health 
services,  acquisitions  of  medical  equipment,  and  construction,  develop- 
ment, or  establishment  of  new  health  care  facilities.  This  is  essentially 
the  coverage  pattern  prescribed  by  NHPRDA  in  its  current  form. 

The  states  with  wholly  distinct  coverage  provisions  are  few.  Alaska 
and  California  do  not  have  general-purpose  capital  expenditure  thresh- 
olds; instead  they  cover  specified  transactions.^"^  All  states  cover  bed 
and  service-related  projects,  and  the  states  that  do  not  expressly  cover 
equipment  acquisitions  or  new  construction  probably  review  such  trans- 
actions under  capital  expenditure  or  service  addition  provisions. 

2.  General-Purpose  Capital  Expenditure  Coverage. — As  noted  above, 
virtually  every  state  covers  capital  expenditures  undertaken  by  or  on 
behalf  of  health  care  facilities.  Coverage  of  general  purpose  capital 
expenditures  has  been  a  common  feature  of  health  planning  agency 
review  of  health  facility  projects  since  the  inception  of  comprehensive 
health  planning.^****  However,  the  levels  of  state  capital  expenditure  thresh- 
olds have  increased  significantly.'"^  Many  states  have  raised  their  thresh- 
olds above  the  maximum  federal  level  (which  would  be  $736,200  in 
states  taking  full  advantage  of  the  threshold  inflator).'"^  This  practice 
appears  most  common  in  the  western  states,  where  Alaska  and  California 
have  capital  thresholds  set  at  one  million  dollars  for  certain  specified  pro- 
jects and  general  purpose  thresholds  in  several  other  states  are  at  similar 
levels. ^"^  Five  other  states  have  thresholds  exceeding  the  federal  level. ^"^ 
Colorado's  two  million  dollar  threshold  is  the  highest  in  the  country. 

However,  there  have  been  proposals  to  raise  thresholds  still  further. 
In  the  97th   Congress,   the   House  of  Representatives   passed,   but   the 


-'"California  has  the  most  unusual  coverage.  New  hospital  construction,  bed  capacity 
increases,  and  additions  of  seven  specified  hospital  services  are  the  only  hospital  projects 
covered.  By  contrast,  establishment  of  surgery  clinics,  any  capital  expenditure  for  expansion 
of  surgical  capacity,  capital  expenditures  in  excess  of  $1  million  for  medical  or  other 
equipment,  services,  or  modernization  by  clinics  and  additions  of  services  by  clinics  are 
covered.  None  of  the  rationales  for  ambulatory  surgery  coverage  under  certificate  of  need 
programs  appear  to  justify  more  extensive  coverage  of  ambulatory  surgery  than  of  hospitals. 
The  California  law  also  contains  a  bewildering  array  of  special  exemptions,  and  an  extremely 
broad  authorization  for  the  SHPDA  to  issue  certificates  of  need  in  disregard  of  the  review 
criteria  in  individual  cases.  Cal.  Health  &  Safety  Code  §  43 7. 10,.  11,.  11 6,.  11 8,.  12,.  15  (Deer- 
ing  Supp.   1985). 

-'"See  supra  note  57  and  accompanying  text. 

-"^See  Table  3. 

-'"See  supra  note  106. 

-"The  general  purpose  threshold  for  Colorado  is  $2,000,000;  for  Montana,  $750,000; 
for  North  Dakota,  $750,000;  for  Oregon,  $1,000,000  or  $250,000  plus  0.5  percent  of  gross 
revenues;  and  for  Washington,  $1,071,000.  See  infra  Table  3. 

-'"^Indiana  ($750,000);  Mississippi  ($1,000,000);  New  Hampshire  ($1,000,000);  North 
Carolina  ($1,000,000);  and  Tennessee  ($1,000,000).  Id. 


1066  INDIANA  LAW  REVIEW  [Vol.  19:1025 

Senate  did  not  act  on,  a  bill  to  supplant  NHPRDA  which  would  have 
increased  the  federal  capital  expenditure  threshold  to  five  million  dol- 
lars.^"'' In  the  98th  Congress,  bills  with  capital  thresholds  ranging  from 
one  to  five  million  dollars  were  introduced,  and  the  Administration 
expressed  its  preference  for  the  higher  of  these  thresholds.^'"  None  of 
these  bills  passed. 

In  the  states  that  have  not  chosen  to  exceed  the  NHPRDA  threshold 
level,  few  have  retained  the  expenditure  thresholds  they  had  in  1980. 
Only  four  states  have  kept  capital  expenditure  thresholds  at  the  $150,000 
level.2" 

A  state  elevating  its  capital  and  other  expenditure  thresholds  to  levels 
at  or  above  one  million  dollars  greatly  increases  the  temptation  to  health 
care  facilities  to  attempt  to  evade  certificate  of  need  review  by  artificially 
dividing  projects  into  two  or  more  stages,  each  costing  less  than  the 
threshold.  When  the  expenditure  threshold  is  $100,000,  the  risks  of 
evasion  of  certificate  of  need  by  dividing,  for  example,  a  $198,000  project 
into  two  $99,000  stages  are  not  likely  to  be  worth  the  benefit  to  the 
facility.  But  with  a  five  million  dollar  threshold,  project  division  could 
permit  a  project  costing  nearly  ten  million  dollars  to  escape  planning 
agency  scrutiny.  In  response  to  this  problem,  several  states  have  adopted 
statutory  prohibitions  on  project  division  undertaken  for  the  purpose  of 
avoiding  certificate  of  need  review. ^'^ 

3.  Non-Clinical  Exemptions  and  Streamlined  Review  Provisions. — 
Even  more  often  than  they  have  elevated  thresholds,  the  states  have 
reduced  project  coverage  by  a  variety  of  categorical  exemptions  and  by 
expedited  review  provisions.  First,  a  number  of  states  have  adopted 
exemptions  for  expenditures  not  related  to  clinical  services.  The  state 
of  Washington,  for  example,  exempts  capital  expenditures  that  will  not 
substantially  affect  patient  charges  and  that  are  for  communications  and 
parking  facilities;  mechanical  or  electrical  ventilation,  heating,  and  air- 
conditioning  systems;  energy  conservation  systems;  repairs  to  physical 


-"^'H.R.  6173,  97th  Cong.,  2d  Sess.  §  5  (1982). 

-'"See  H.R.  2934,  98th  Cong.,  1st  Sess.  (1983);  H.R.  2935,  98th  Cong.,  1st  Sess. 
(1983);  Letter  from  David  Stockman,  Director,  Office  of  Management  and  Budget  to  Rep. 
Edward  Madigan  (Aug.  4,   1983). 

-"Delaware,  Michigan,  Rhode  Island,  and  Vermont.  Two  states,  Oklahoma  and  South 
Dakota,  have  raised  their  capital  thresholds  for  hospitals  to  current  NHPRDA  levels  while 
retaining  lower  thresholds  for  nursing  facilities. 

-'-D.C.  Code  Ann.  §  32-302(12)(B)  (1981);  Ky.  Rev.  Stat.  §  2168.061(2)  (Supp. 
1982);  Me.  Rev.  Stat.  Ann.  tit.  22,  §  315  (1980);  Miss.  Code  Ann.  §  41-7-173(b)(ii) 
(Supp.  1984);  Neb.  Rev.  Stat.  §  71-5832  (Supp.  1984);  N.H.  Rev.  Stat.  Ann.  §  151- 
C:4(I)(C),(II)  (Supp.  1983);  1984  Ohio  Legis.  Bull.  §  3702.59(B)  (Anderson);  Or.  Rev. 
Stat.  §  442.320(d)  (Supp.  1983);  S.D.  Codified  Laws  Ann.  §  34-7A-33  (Supp.  1984); 
Vt.  Stat.  Ann.  §§  2403(a)(3),(b)  (1983);  W.  Va.  Code  §  16-2D-2(i)(2)(B)  (Supp.  1984); 
Wis.  Stat.  Ann.  §  150.07  (West  Supp.   1985). 


1986]  CERTIFICATE  OF  NEED  1067 

plant  necessary  to  maintain  state  licensure;  acquisition  of  data  processing 
and  other  equipment;  construction  of  facilities  not  used  for  direct  pro- 
vision of  health  services;  land  acquisition;  and  refinancing  existing  debt.^'^ 
In  addition,  a  significant  number  of  states  provide  for  expedited  or 
streamlined  review  of  various  categories  of  projects.  Most  states  have 
adopted  the  NHPRDA-authorized  provision  for  limited  review  of  projects 
to  eliminate  safety  hazards  or  to  comply  with  licensure  or  accreditation 
requirements.^"*  Numerous  states  also  provide  for  expedited  review  of 
projects  such  as  capital  expenditures  not  involving  service  or  bed  capacity 
increases,  service  terminations,  expenditures  below  a  threshold  somewhat 
higher  than  their  statutory  coverage  minimum,  and  the  like.^'^  Some 


-"Wash.  Rev.  Code  Ann.  §  70.38. 105(4Kd)  (Supp.  1986);  see  also  Ariz.  Rev.  Stat. 
Ann.  §  36-433(E)(6)  (Supp.  1975-1984)  (energy  conservation  projects);  Cal.  Health  & 
Safety  Code  §  437.10(e)(5)  (Deering  Supp.  1985)  (parking  lots  and  structures,  telephone 
systems,  and  non-clinical  data-processing  systems);  Colo.  Rev,  Stat.  §  25-3-503(7)  (1982) 
(residential  units,  parking,  telephone  systems,  day-care,  mailroom,  gift  shops,  printshops, 
medical  office  buildings  or  clinics  organized  primarily  for  the  delivery  of  physician  services, 
morgue,  heating  and  air  conditioning,  blood  bank,  dietary/cafeteria,  laundry  and  linen, 
administration,  medical  records,  business  office,  housekeeping,  central  supply,  materials 
management,  library,  reception,  code  violations  in  non-clinical  areas,  ground  transport 
services  (not  including  air),  land  acquisition,  research,  education,  non-diagnostic  manage- 
ment information  systems);  Conn.  Gen.  Stat.  Ann.  §  19a-155  (West  Spec.  Supp.  1984) 
(energy  conservation  systems);  Ga.  Code  Ann.  §§  31-6-47,  47(c)  (1985)  (waiver  of  review 
of  projects  including  those  defined  by  regulation  Ga,  Admin.  Comp,  ch.  272-2,  §  272-2-07 
(1984),  such  as  site  acquisitions,  transfers  of  previously-approved  major  medical  equipment 
not  resulting  in  institution  of  a  new  clinical  health  service  at  the  transferee  facility,  and 
expenditures  below  the  capital  expenditure  threshold  for  minor  repair  or  replacement  of 
equipment  associated  with  the  physical  plant);  Haw^aii  Rev.  Stat.  §  323D-54(b)  (Supp.  1984) 
(projects  determined  not  to  have  a  significant  impact  on  the  health  care  system,  defined 
by  regulation  [Haw,  Admin,  Code  §  11-186-96  (1981)]  to  include  acquisition  of  a  capital 
asset  by  a  means  other  than  purchase;  bed  supply  increases  or  decreases  not  exceeding  the 
capital  expenditure  of  annual  operating  cost  threshold;  addition  or  deletion  of  a  service 
not  exceeding  an  annual  operating  cost  threshold;  certain  structural  repairs;  equipment  replace- 
ment not  exceeding  twice  the  expenditure  minimum;  non-patient  care  projects  such  as  park- 
ing lot  structures  not  exceeding  twice  the  expenditure  minimum);  Mont,  Code  Ann. 
§  50-5-309(1  )(a)  (1985)  (expenditures  for  non-medical  and  non-clinical  facilities  and  services 
unrelated  to  the  operation  of  the  health  care  facility);  Or.  Rev.  Stat.  §  442, 320(b)  (Supp, 
1983)  (statutory  authorization  for  adoption  of  rules  providing  for  waiver  of  review  of  ex- 
penditures for  repairs  by  replacement  of  equipment,  non-clinically  related  capital  expen- 
ditures, and  offering  or  development  of  a  new  health  service  of  a  non-substantive  nature); 
Executive  Budget  Bill,  Act  29,  1985  Wis,  Legis.  Serv.  390  (West)  (to  be  codified  at  Wis, 
Stat,  Ann.  §  150,613  (West))  (hospital  heating,  air  conditioning,  ventilation,  electrical  systems, 
energy  conservation,  telecommunications,  computer  systems,  or  non-surgical  outpatient  ser- 
vices not  part  of  an  otherwise  reviewable  project  and  whose  capital  cost  does  not  exceed 
20%  of  the  hospital's  gross  annual  patient  revenue  for  its  last  fiscal  year), 

-'^5ee  supra  note  159  and  accompanying  text, 

-"Ala.  Code  §  22-21-275(4)  (Supp.  1984)  (non-substantive  review  of  capital  expend- 
itures up  to  $500,000  which:  do  not  result  in  a  substantial  change  in  a  service;  or  propose 
equipment  to  upgrade  or  expand  an  existing  service;  or  increase  bed  capacity  by  not  more 


1068  INDIANA  LAW  REVIEW  [Vol.  19:1025 

States  without  specific  statutory  procedures  for  expedited  review  have 


than  ten  percent);  Ariz.  Rev.  Stat.  Ann.  §  36-433(G)  (Supp.  1984)  (abbreviated  application 
for  all  projects  except  establishment  of  new  services  with  annual  operating  costs  exceeding 
$75,000;  construction  of  new  health  care  facilities;  and  capital  expenditures,  other  than 
expenditures  for  equipment  replacement,  exceeding  $150,000);  Cal.  Health  &  Safety 
Code  §  437.15  (Deering  Supp.  1985)  (expeditious  processing  of  applications  for  projects 
for  sole  community  provider  hospitals  with  less  than  100  beds;  projects  for  skilled  nursing 
or  intermediate  care  facility  establishment,  projects  for  addition  of  skilled  nursing  or 
intermediate  care  beds  in  facilities  other  than  skilled  nursing  or  intermediate  care  facilities); 
Fla.  Stat,  Ann.  §  381.494(l)(n)  (West  Supp.  1985)  (expedited  review  of  transfer  of  a  cer- 
tificate of  need);  Ga.  Code  Ann.  §  31-6-47(c)  (1985)  (statutory  authorization  for  SHPDA 
to  conduct  expedited  review  of  projects,  where  compatible  with  statutory  purposes);  Iowa 
Code  Ann.  §  135.67  (West  Supp.  1984-85)  (summary  review  procedures  for  projects  costing 
$150,000  or  less;  and  projects  for  which  the  applicant,  the  state  agency,  and  the  HSA  agree 
to  summary  review);  Ky.  Rev.  Stat.  §  216B.095  (Supp.  1982)  (non-substantive  review  of 
applications  to  replace  or  repair  five-year-old  worn  equipment;  repairs,  alterations,  or  im- 
provements to  physical  plant  not  resulting  in  a  substantial  change  in  beds/services  or  equip- 
ment addition;  and  other  applications  as  prescribed  by  state  agency  regulations);  Me.  Rev. 
Stat.  Ann.  tit.  22,  §  304-C  (Supp.  1985-86)  (waiver  of  review  of  new  health  services  pro- 
jects involving  a  capital  expenditure  below  $300,000,  third  year  annual  operating  costs  bet- 
ween $155,000  and  $250,000  and  no  increase  in  reimbursement  authorization  by  rate-setting 
commission);  Mich.  Comp.  Laws  Ann.  §  333.22151  (1980)  (non-substantive  review  of  pro- 
jects for  which  full  review  could  increase  cost  by  unnecessary  delay  or  require  inefficient 
use  of  staff  review  time);  Miss.  Code  Ann.  §  41-7-205  (Supp.  1984)  (non-substantive  review 
of:  certain  transfers  of  ownership;  replacement  of  equipment;  general-purpose  capital  ex- 
penditures not  exceeding  $700,000;  acquisition  of  major  medical  equipment  not  exceeding 
$460,000;  certain  project  cost  overruns;  and  deletion  or  relocation  of  services  or  facilities); 
Mo.  Ann.  Stat.  §  197.305(12)  (Vernon  Supp.  1985)  (non-substative  review  of  capital  ex- 
penditures due  to  an  act  of  God  or  a  normal  consequence  of  maintaining  health  care  ser- 
vices, facilities,  or  equipment  which  do  not  involve  bed  addition,  replacement,  moderniza- 
tion, conversion,  or  new  services);  Mont.  Code  Ann.  §  50-5-302  (Supp.  1984)  (abbreviated 
review  of  proposals  that  do  not  significantly  affect  the  cost  or  use  of  health  care  or  that 
have  been  approved  by  the  legislature);  Neb.  Rev.  Stat.  §  71-5834  (Supp.  1984)  (non- 
substantive review  of  replacement  of  equipment  with  equipment  of  similar  capability;  reduction 
in  bed  capacity  or  termination  of  a  single  service  which  does  not  involve  the  closing  or 
relocation  of  a  health  facility;  expenditures  for  energy  conservation  proposals);  1984  Ohio 
Legis.  Bull.  §  3702. 52( J)  (Anderson)  (expedited  review  of:  capital  expenditures  less  than 
$1.5  million  not  involving  bed  or  service  additions,  equipment  acquisition,  new  facility  con- 
struction, or  facility  category  conversion;  additions  of  new  services  with  capital  costs  less 
than  the  expenditure  care  minimum,  annual  operating  costs  less  than  $500,000  and  no  bed 
additions;  non-patient-related  capital  expenditures  not  affecting  patient  charges;  bed  capaci- 
ty increases  or  redistributions  up  to  nine  beds  or  ten  percent  of  bed  capacity  (or  bed  reloca- 
tions), whichever  is  less,  in  any  two  year  period,  and  not  involving  a  health  service  addition 
or  a  capital  expenditure  exceeding  the  expenditure  minimum;  acquisition  of  medical  equip- 
ment for  less  than  $1.25  million;  replacement  of  medical  equipment  for  less  than  $1.5  million; 
and  other  projects  specified  by  regulation);  Or.  Rev.  Stat.  §  442.320(b)  (Supp.  1983) 
(statutory  authorization  for  adoption  of  rules  providing  for  accelerated  review  of  expen- 
ditures for  repairs  and  replacement  of  plant  or  equipment;  non-clinically  related  capital  ex- 
penditures, and  offering  or  development  of  a  new  health  service  of  a  non-substantive  nature); 
Pa.  Stat.  Ann.  tit.  35,  §  448.702G)(2)  (Purdon  Supp.  1984-85)  (exemption  from  comparative 
review  requirements  for  replacement  of  equipment  not  involving  a  substantial  change  in 
functional  capacity  or  capability;  energy-saving  equipment  installations  or  renovations  not 


1986]  CERTIFICATE  OF  NEED  1069 

adopted  such  mechanisms  by  regulation. ^'^  Several  states  provide  for 
exemption  or  expedited  review  of  projects  for  replacement  of  facilities 
or  equipment. 2'^  A  few  have  implemented  the  NHPRDA  exemption  for 


involving  new  services  or  expansion  of  capacity);  R.I.  Gen.  Law^s  §  23-15-5  (Supp.  1984) 
(statutory  authorization  for  adoption  of  regulations  specifying  projects  eligible  for  expen- 
ditious  review);  S.D.  Codified  Laws  Ann.  §  34-7A-39  (Supp.  1984)  (abbreviated  review 
of  projects  which:  increase  bed  capacity,  redistribute  beds  among  categories,  or  relocate 
beds  from  one  facility  to  another,  by  less  than  ten  beds  or  ten  percent  of  bed  capacity; 
capital  expenditures  to  remedy  emergency  situations;  and  other  projects  declared  eligible 
for  abbreviated  review  by  regulation);  W.  Va.  Code  §  16-2D-7(v)  (Supp.  1984)  (statutory 
authorization  for  adoption  of  regulations  specifying  applications  eligible  for  expedited  review); 
Wyo.  Stat.  §  35-2-206(c)  (1977)  (department  review  of  temporary  addition  or  subtraction 
of  beds  or  equipment  and  replacement  services  or  expenditures  which  are  comparable  and 
necessary  to  maintain  services). 

-"E.g.,  Idaho  Admin.  Proc.  Manual  tit.  2,  §  16.02,  11300,  02  (1983)  (non-substantive 
section  1122  review  of  repair  or  replacement  of  physical  plant  and  equipment  associated 
with  physical  plant,  i.e.,  boilers,  air  conditioning,  electrical  circuitry);  Division  of  Policy, 
Planning  &  Evaluation,  Office  of  Management  &  Finance,  La.  Dep't  of  Health  & 
Human  Resources,  Policies  and  Guidelines  for  Review  of  Capital  Expenditures 
Under  Section  1122  of  the  Social  Security  Act  6-7  (1985)  (expedited  section  1122 
review  of  replacement  or  modification  of  equipment,  sale  of  an  existing  facility  with  no 
change  in  beds  or  services,  lease  (or  discontinuance  of  a  lease)  of  an  approved  existing 
facility  with  no  change  in  beds  or  services,  renovation  of  an  existing  facility  up  to  $1,000,000 
not  resulting  in  a  bed  or  service  change;  cost  overrun;  addition  of  non-medical  equipment 
or  purchase  of  land;  addition  of  a  new  service  in  an  existing  facility  not  exceeding  $600,000; 
incorporation,  reorganization,  merger,  consolidation,  majority  stock  sale  or  transfer  or 
other  changes  in  the  person  owning  an  approved  facility;  non-substantial  site  change;  bed 
capacity  reduction;  and  discontinuance  of  an  approved  service);  N.J.  Admin.  Code  tit. 
8,  §  33-2.5  (1985)  (administrative  review  of  increase  in  residential  health  care  facility  beds 
of  ten  beds  or  ten  percent  of  Hcensed  capacity,  whichever  is  less;  change  in  bed  category 
not  involving  a  capital  expenditure  or  an  increase  in  total  licensed  capacity,  additions  of 
new  services,  fixed  or  moveable  equipment,  or  renovations  required  by  law  or  to  prevent 
harm  to  patients;  transfer  of  a  patient  care  service  in  whole  or  part  to  another  corporate 
entity;  replacement  of  equipment;  acquisition  of  telephone  or  computer  systems  in  excess 
of  $400,000;  and  acquisition  of  fixed  equipment  or  renovation  dealing  exclusively  with  energy 
conservation);  N.Y.  Admin.  Code  tit.  10,  §  710.1(c)(3)  (1985)  (administrative  approval  of: 
proposals  not  exceeding  $3  million  for  addition  or  modification  of  a  licensed  service,  with 
exceptions  for  certain  specialized  services;  bed  or  service  decertification;  certain  bed-category 
conversions,  additions  to  existing  services  not  involving  an  additional  site  or  beds,  projects 
for  correction  of  safety  deficiencies,  ordinary  repairs,  energy  conservation,  and  moderniza- 
tion in  facilities  for  which  there  is  a  continuing  need;  replacement  and  updating  of  equip- 
ment in  needed  facilities;  addition  or  deletion  of  approval  to  operate  part-time  clinics;  opera- 
tion or  relocation  of  extension  clinics;  emergency  room  modernization;  projects  identified 
as  high  priority  in  the  state  medical  facilities  plan). 

-"Ga.  Code  Ann.  §  31-6-47(a)(10)  (1985)  (exemption  of  expenditures  for  replacement 
of  equipment  including  but  not  limited  to  CT  scanners);  Ky.  Rev.  Stat.  §  216B.095 
(Supp.  1982)  (nonsubstantive  review  of  replacement  of  equipment  used  for  five  years  or 
more  and  repairs,  alterations,  and  improvements  to  physical  plant  not  resulting  in  bed 
or  services  changes  or  equipment  additions);  Miss.  Code  Ann.  §§  41-7-191(2),  205  (Supp. 
1985)  (exemption  from  health  facility  expansion,  construction  moratorium  for  necessary 
repairs  and  renovation  or  replacement  of  an  existing  facility);  Mo.  Ann.  Stat.  §  197.305(12) 


1070  INDIANA  LAW  REVIEW  [Vol.  19:1025 

research  projects. ^"^  The  approval  rates  for  projects  eHgible  for  expedited 
review  tend  to  be  very  high,  making  expedited  review  effectively  very 
similar  to  an  exemption  from  review. 

In  short,  the  majority  of  states  have  employed  exemptions  and 
expedited  review  to  diminish  substantially  the  range  of  projects  subject 
to  review  and  to  focus  review  on  projects  for  new  or  significantly 
expanded  clinical  service  capacity.  The  practice  is  not  confined  to  the 
states  with  high  thresholds.  Two  of  the  four  states  that  have  retained 
thresholds  at  the  $100,000  -  $200,000  level  have  adopted  some  form  of 
expedited  review  or  non-substantive  project  exemption. ^''^ 

4.  Bed-Related  Coverage. — All  jurisdictions  with  certificate  of  need 
or  section  1122  programs  cover  bed  supply  increases  in  some  fashion. 
Even  states  like  California  and  Colorado,  which  have  sharply  cut  back 
on  coverage  by  repealing  or  greatly  increasing  expenditure  thresholds, 
continue  to  review  increases  in  bed  capacity.  However,  over  half  the 
states  have  adopted  insubstantial  increase  exemptions,  an  increase  from 
the  number  reported  in  earlier  surveys. ^^"  Most  states  use  the  "ten  beds 
or  ten  percent"  exemption  authorized  by  NHPRDA.  California  and 
Georgia  exempt  *'ten  beds  or  ten  percent"  increases  from  review  only 
if  the  facility  meets  certain  occupancy  rate  minimums,^^'  while  Colorado 
exempts  from  review  a  twenty  bed  increase  every  two  years. ^^^ 

Thirty-five  states  cover  some  form  of  bed  category  conversion  or 
bed  relocation,  while  over  half  the  states  cover  bed  capacity  decreases. 


(Supp.  1985)  (nonsubstantive  review  of  replacement  and  modernization  projects);  Neb. 
Rev.  Stat.  §  71-5835  (Supp.  1984)  (nonsubstantive  review  of  equipment  replacement); 
1984  Ohio  Legis.  Bull.  §  3702. 52( J)  (Anderson)  (expedited  review  of  replacement  of  equip- 
ment under  $1.5  million);  Or.  Rev.  Stat.  §  442.320(a)(b)  (Supp.  1983)  (accelerated 
review  of  repairs  or  replacement  of  plant  or  equipment);  Pa.  Stat.  ann.  tit.  35, 
§  448.702G)(2)  (Purdon  Supp.  1984-85)  (exemption  from  comparative  review  requirements 
for  equipment  replacement  and  renovation  to  meet  code  requirements);  Wyo.  Stat.  §  35- 
2-206(d)  (Supp.  1985)  (expedited  review  of  expenditures  for  upgrading  and  replacing 
equipment,  and  replacement  services  or  expenditure  to  upgrade,  acquire,  or  implement 
new  technology  which  may  be  comparable  and  necessary  to  maintain  services);  N.J.  Admin. 
Code  tit.  8,  §  33-2. 7(a)(7)  (1985)  (expedited  review  of  equipment  replacement);  N.Y. 
Admin.  Code  tit.  10,  §  710.1(b)(c)(3)  (1985)  (administrative  review  of  projects  under  $3 
million  for  modernization  of  facilities  and  replacement  and  updating  of  equipment  for 
which  there  is  continuing  need). 

-'^Ky.  Rev.  Stat.  §  216B.066  (Supp.  1982);  Mass.  Gen.  Laws  Ann.  ch.  Ill,  §  25C 
(West  1983);  Neb.  Rev.  Stat.  §  71-5830.01  (Supp.  1984);  N.C.  Gen.  Stat.  §  131E-179 
(Supp.  1983);  Tex.  Rev.  Civ.  Stat.  Ann.  art.  4418h,  §  3.01(d)  (Vernon  Supp.  1984);  W. 
Va.  Code  §  16-2D-4(c)  (Supp.   1984). 

^"'Michigan  and  Rhode  Island  have  adopted  expedited  review  provisions.  See  supra 
note  215. 

--"See  supra  note  109  and  accompanying  text. 

--'Cal.  Health  &  Safety  Code  §  437.11(4)  (Deering  Supp.  1985);  Ga.  Code  Ann. 
§  31-6-47(15)  (1985). 

-Colo.  Rev.  Stat.  §  25-3-506(e)  (1982). 


1986]  CERTIFICATE  OF  NEED  1071 

The  recent  amendments  to  the  NHPRDA  regulations  permitting  com- 
plying state  certificate  of  need  programs  to  make  their  own  determinations 
as  to  whether  to  cover  such  transactions  will  probably  cause  a  decrease 
in  these  figures. 

C.     Health  Service-Related  Coverage 

Table  3  indicates  that  all  of  the  states  with  certificate  of  need  or 
section  1122  programs  cover  additions  of  new  health  services.  Half  cover 
service  terminations,  but  because  only  nine  states  cover  terminations  not 
associated  with  a  capital  expenditure  and  terminations  do  not  usually 
involve  capital  expenditure,  actual  review  of  service  terminations  appears 
to  be  a  relatively  infrequent  practice. 

Twenty-six  states  have  adopted  annual  operating  cost  thresholds.-^ 
Thresholds  vary  widely,  from  $75,000  in  Rhode  Island  to  $536,000  in 
Washington.  Just  five  states,  however,  cover  health  service  additions 
only  if  they  are  associated  with  annual  operating  costs  exceeding  the 
threshold. ^^^  The  remaining  states  either  cover  health  service  additions 
regardless  of  cost  or,  following  the  NHPRDA  model,  cover  health  service 
additions  associated  with  any  capital  expenditure.  Both  of  the  latter 
approaches  appear  inconsistent  with  the  policy  underlying  annual  op- 
erating cost  thresholds,  which  is  to  target  the  cost  containment  functions 
of  certificate  of  need  while  minimizing  the  scope  of  coverage  by  reviewing 
only  those  service  additions  that  generate  additional  long-term  costs. ^^- 

A  number  of  states  have  adopted  a  new  approach  to  coverage  of 
health  service  additions.  These  states  cover  additions  of  a  small  number 
of  specified  new  health  services  regardless  of  their  capital  or  operating 
cost,  and  all  other  new  services  only  if  their  capital  or  operating  costs 
exceed  a  threshold.  For  example,  Wisconsin  covers  additions  of  organ 
transplant  programs,  burn  centers,  neonatal  intensive  care  units,  cardiac 
programs,  and  air  transport  programs  without  regard  to  cost.^^^  Other 


"The  states  differ  in  the  way  they  define  their  annual  operating  cost  thresholds. 
Maine,  for  example,  uses  the  projected  annual  operating  costs  without  any  adjustment 
for  inflation  for  the  third  fiscal  year  of  operation,  including  a  partial  first  year.  "Annual 
operating  costs"  are  defined  as  "total  incremental  costs  to  the  institution  which  are  directly 
attributable  to  the  addition  of  a  new  health  service."  Me.  Rev.  Stat.  Ann.  tit.  22,  §§ 
303(2)(A),  304-A(4)(B)  (Supp.  1984-85).  The  District  of  Columbia  employs  an  "annual 
operating  budget"  threshold,  Maryland  an  "annual  operating  revenue"  threshold.  D.C. 
Code  Ann.  §  32-302(12)(D)  (Supp.  1984);  Md.  Health-General  Code  Ann.  §  19- 
115a)(2)(ii)  (Supp.   1985). 

--^Maryland,  Missouri,  Montana,  Oklahoma,  and  Wyoming. 

"The  statutory  certificate  of  need  coverage  approach  of  Montana  and  Wyoming 
appears  to  come  the  closest  to  accomplishing  this  policy.  They  have  relatively  high  capital 
expenditure  and  major  medical  equipment  thresholds  and  $100,(XX)-$150,0(X)  operating  cost 
thresholds.  Under  this  approach,  projects  are  subject  to  review  only  if  they  increase  long- 
term  operating  costs  or  represent  high,  one-time  capital  expenditures. 

"M985  Wis.  Legis.  Serv.  390  (West)  (to  be  codified  at  Wis.  Stat.  §§  150.61(1),(2)). 


1072  INDIANA  LAW  REVIEW  [Vol.  19:1025 

hospital  service  additions  are  covered  only  if  capital  costs  exceed 
$1,000,000.22^  Similarly,  Ohio  covers  additions  of  heart,  lung,  liver,  and 
pancreas  transplant  programs  without  regard  to  cost  and  other  new 
services  only  if  their  annual  operating  costs  exceed  $297,500,228  Other 
states  may  achieve  a  similar  coverage  pattern  through  exemptions  or 
streamlined  review.  New  York,  for  example,  provides  for  "administrative 
approval"  of  service  additions  or  modifications  unless  the  project  cost 
will  exceed  $3,000,000  or  relates  to  certain  specified  service  categories. 22*^ 
The  purpose  of  this  approach  seems  to  be  to  cover  without  regard  to 
cost  the  services  for  which  non-cost  containment  rationales  for  certificate 
of  need  review  apply  and  to  cover  the  services  for  which  cost-control 
is  the  paramount  concern  only  if  project  costs  exceed  the  threshold.  The 


--'Id. 

--M984  Ohio  Legis.  Bull.  §  3702.5 1(R)(2),  (9)  (Anderson);  see  also  Ariz.  Rev.  Stat. 
Ann.  §§  36-433(A)(5),(6)  (Supp.  1975-84)  (repealed  1985)  (coverage  of  additions  of  ob- 
stetrical units,  neo-natal  special  care  units,  pediatric  inpatient  services,  open-heart  surgery 
units,  cardiac  catheterization  services,  radiation  therapy  services,  end-stage  renal  dialysis 
services,  computed  tomographic  scanning,  neurological  units,  spinal  injury  units,  and  burn 
treatment  units  regardless  of  cost,  and  additions  of  other  services  only  if  their  operating 
costs  exceed  $750,000);  Colo.  Rev.  Stat.  §§  25-3-503(10),  506(l)(d)  (1982)  (repealed  1984) 
(coverage  of  tertiary  services  [i.e.,  highly  specialized  services  frequently  requiring  sophis- 
ticated technology  and  support  services  and  limited  to  open-heart  surgery,  organ  trans- 
plantation, burn  care,  level  III  intensive  care  nurseries,  and  radiation  therapy]  at  any  cost, 
and  coverage  of  only  those  other  services  exceeding  threshold);  Illinois  Health  Facilities 
Planning  Board,  Illinois  Health  Care  Facilities  Plan  §  3. 02. B. 29  (1982)  (coverage  of 
acute  mental  illness,  alcoholism  treatment,  burn  treatment,  cardiac  catheterization,  com- 
puter systems,  end-stage  renal  disease,  intensive  care,  medical-surgical,  non-hospital  based 
ambulatory  surgery,  obstetrical  services,  open-heart  surgery,  pediatric  services,  perinatal  high 
risk,  radiation  therapy,  rehabilitation  services  additions  regardless  of  cost;  other  services 
exceeding  annual  operating  costs  threshold);  Ky.  Rev.  Stat.  §  216B.015(25)  (Supp.  1982) 
(coverage  of  health  service  additions  exceeding  $250,000  annual  operating  cost  or  additions 
of  services  specified  in  State  Health  Plan,  regardless  of  cost.  The  Kentucky  State  Health 
Plan  provides  for  coverage  of  acute  care  services,  open-heart  surgery,  cardiac  catheteriza- 
tion, radiation  therapy  utilizing  megavoltage  equipment,  end-stage  renal  disease  services, 
CT  scanners,  nuclear  magnetic  resonance  imaging,  and  long-term  care  services);  Me.  Rev. 
Stat.  Ann.  tit.  22,  §  304-A(4)  (Supp.  1984-85)  (coverage  of  new  services  regardless  of  cost 
identified  in  regulations  or  new  services  exceeding  the  annual  operating  cost  threshold;  no 
regulations  adopted  to  date);  Mass.  Gen.  Laws  Ann.  ch.  Ill,  §  25B  (1983);  Mass.  Admin. 
Code  tit.  105,  §  100.020  (1983)  (coverage  of  "major  services"  without  regard  to  cost  and 
of  only  those  other  services  exceeding  annual  operating  cost  threshold);  1985  Or.  Laws, 
ch.  747  §  16  (to  be  codified  at  Or.  Rev.  Stat.  §  442.015(24));  Or.  Admin.  R.  409-03-010(10) 
(1985)  (coverage  of  new  health  services  exceeding  annual  operating  expense  threshold  or 
new  health  services,  regardless  of  cost,  which  may  compromise  quality  of  care);  Tenn.  Ad- 
min. CoMP.  §  0720-2-.02(2)(d)  (1985)  (coverage  of  specified  set  of  major  health  services  without 
regard  to  cost  and  other  services  with  projected  annual  operating  budget  exceeding  $500,000 
threshold). 

--■"Therapeutic  radiology,  open-heart  surgery,  cardiac  catheterization,  kidney  and  heart 
transplant,  chronic  and  acute  renal  dialysis,  CT  scanning,  burn  care,  and  extracorporeal 
Shockwave  lithotripsy  require  approval  regardless  of  cost.  N.Y.  Admin.  Code  tit.  10, 
§  710.1(c)(3)  (1985). 


1986]  CERTIFICATE  OF  NEED  1073 

Oregon  provision  does  so  most  explicitly,  by  covering  new  services  either 
if  they  exceed  the  annual  operating  expense  threshold  or  may  potentially 
compromise  quality  of  care  through  insufficient  volume  to  support  needed 
specialized  staff  or  to  maintain  skills.^^" 

NHPRDA  and  section  1122  left  the  states  free  to  define  which  newly- 
established  '^services"  would  be  subject  to  certificate  of  need  review. ^^' 
Most  states  appear  to  have  never  specified  in  their  statutes  or  regulations 
the  "health  services"  they  subject  to  review.  However,  some  have  done 
so.  The  states  listed  above  as  covering  some  specified  health  service 
additions  regardless  of  cost,  of  course,  have  at  least  a  partial  list.  In 
addition,  California's  certificate  of  need  provisions  cross-reference  a 
statutory  list  of  special  services  subject  to  health  facility  licensure."^  The 
Georgia  statute  contains  a  non-inclusive  list  of  clinical  health  services 
subject  to  review,  which  corresponds  roughly  to  the  major  service  de- 
partments in  a  typical  large  hospital. '^^  Finally,  a  few  states  cover 
expansions  of  existing  services. ^^"^  However,  most  cover  only  service 
additions. 

D.     Major  Medical  Equipment  Coverage 

In  most  states,  acquisition  of  medical  equipment  by  or  on  behalf 
of  a  health  care  facility  is  subject  to  certificate  of  need  review  as  a 
capital  expenditure  if  the  capital  expenditure  associated  with  the  acqui- 
sition exceeds  the  expenditure  threshold."^  However,  the  1979  NHPRDA 


-'"Or.  Admin.  R.  409-03-010  (1985). 

-^^See  supra  notes  122-28  and  accompanying  text. 

-'-Cal.  Health  &  Safety  Code  §  437.10(c)  (Deering  Supp.   1985). 

-'^Ga.  Code  Ann.  §  31-6-2(5)  (1985)  provides: 

"Clinical  health  services"  means  diagnostic,  treatment,  or  rehabilitative  ser- 
vices provided  in  a  health  care  facility,  or  parts  of  the  physical  plant  where  such 
services  are  located  in  a  health  care  facility,  and  includes,  but  is  not  limited  to, 
radiology;  radiation  therapy;  surgery;  intensive  care;  coronary  care;  pediatrics; 
gynecology;  obstetrics;  dialysis;  general  medical  care;  medical/surgical  care;  inpa- 
tient  nursing   care,    whether   intermediate,    skilled,    or   extended   care;    cardiac 
catheterization;  open-heart  surgery;  inpatient  rehabilitation;  and  alcohol,  drug  abuse, 
and  mental  health  services. 
See  also  Alaska  Stat.  §  18.07.1 1 1(8)  (1981)  (health  service  defined  as  major  type,  program, 
unit,  division,  or  department  of  care,  including  outpatient,  psychiatric  wing,  kidney  dialysis, 
radiotherapy,  burn  unit,  newborn  intensive  care  unit);  R.I.  Gen.  Laws  §  23-15-2(h)  (1979) 
(health  services  defined  as  "organized  program  components"  for  providing  services);  Minn. 
Stat.  Ann.  §   145.833  Subd.  3  (West   1982)  (repealed   1984)  (health  services  defined  as 
cost  centers  recognized  by  generally  accepted  accounting  principles  and  conforming  to  cost 
center  definitions  used  by  state  rate-setting/price  disclosure  program). 

='^1985  Nev.  Adv.  Sh.  ch.  454,  §  13  (to  be  codified  at  Nev.  Rev.  Stat.  §  439A.100(2)(c)); 
Or.  Admin.  R.  409-03-010(6)  (1985). 

-"In  some  states,  the  acquisition  of  certain  types  of  equipment  may  also  constitute 
a  covered  addition  of  a  new  service.  For  example,  acquisition  of  a  CT  scanner  constitutes 
a  new  service  in  Arizona  and  Kentucky.  See  supra  note  228. 


1074  INDIANA  LAW  REVIEW  [Vol.  19:1025 

amendments  authorized  a  distinct  category  of  coverage,  acquisitions  of 
medical  equipment  exceeding  an  expenditure  minimum  lower  than  the 
all-purpose  capital  expenditure  threshold  if  the  equipment  is  owned  by 
or  located  in  a  health  care  facility  or  used  to  provide  services  for 
in-patients. ^^^  Most  states  have  adopted  this  coverage  category,  with  sta- 
tutory equipment  thresholds  varying  from  $125,000  to  $1,000,000. 

Seventeen  states  cover  acquisitions  of  medical  equipment  that  may 
be  used  for  persons  who  are  not  in-patients  of  a  health  care  facility. 
Virginia  covers  acquisition  by  a  physician's  office  of  equipment  that  is 
generally  and  customarily  associated  with  the  provision  of  health  services 
in  an  in-patient  setting. ^^^  Fifteen  states  and  the  District  of  Columbia 
cover  equipment  acquisitions  in  various  non-in-patient  settings. ^^^  Most 
of  these  states  added  their  coverage  of  equipment  in  non-institutional 
settings  after  witnessing  placement  of  CT  scanners  and,  most  recently. 


-"•Pub.  L.  No.  96-79,  §  117,  93  Stat.  592,  615  (1979)  (codified  as  amended  at  42 
U.S.C.  §  300m-3). 

-"Va.  Code  §  32.1-102.1  (Supp.   1985). 

-"*CoLO.  Rev.  Stat.  §  25-3-506(1  )(g)  (Supp.  1985)  (capital  expenditure  exceeding  $1 
million  by  or  on  behalf  of  any  person  or  entity  for  major  medical  equipment  to  provide 
clinically  related  health  care);  Conn.  Stat.  Ann.  §  19a-l 55(b)  (West  Spec.  Pamp.  1984) 
(capital  expenditure  exceeding  $400,000,  by  any  person,  to  acquire  imaging  equipment); 
D.C.  Code  Ann.  §  32-302(1 1)(A)  (Supp.  1984)  (acquisition  of  medical  equipment  with  a 
value  exceeding  $400,000  by  physicians,  dentists,  or  other  individual  providers  of  individual 
group  practice);  Hawaii  Rev.  Stat.  §§  323D-53,  54  (Supp.  1984)  (acquisition  of  equipment 
exceeding  expenditure  threshold  by  physicians'  offices);  Iowa  Code  Ann.  §  135.61(19)(g) 
(West  Supp.  1984-85)  (expenditure  exceeding  $400,000  by  individual  or  group  of  health 
care  providers  for  equipment  installed  in  private  office  or  clinic);  Md.  Health-General 
Code  Ann.  §§  19-1001  et  seq.  (Supp.  1985)  (licensure  of  major  medical  equipment  wherever 
located  costing  in  excess  of  $600,000);  Miss.  Code  Ann.  §  41-7-191(l)(0  (Supp.  1985) 
(acquisition  or  control  of  major  medical  equipment  exceeding  $750,000  by  any  person); 
Mont.  Code  Ann.  §  50-5-301  (d)  (Supp.  1984)  (acquisition  by  any  person  of  medical  equip- 
ment exceeding  $500,00  which  would  have  required  a  CON  if  acquired  by  a  health  care 
facility);  1985  Nevada  Adv.  Sh.  ch.  454,  §§  9,  13  (to  be  codified  at  Nev.  Rev.  Stat. 
§§  439A.015(10),  .100(d)  (acquisition  of  medical  equipment  exceeding  $400,000  by  the  of- 
fice of  a  health  services  practitioner);  1985  N.H.  Laws,  ch.  378,  §  378:6  (to  be  codified 
at  N.H.  Rev.  Stat.  Ann.  §  151-C:5(II)(D))  (acquisition  of  equipment  exceeding  $400,000 
by  a  health  care  provider);  1985  N.C.  Adv.  Legis.  Serv.,  ch.  740,  §  6  (to  be  codified  at 
N.C.  Gen.  Stat.  §  131E-176(16)(g))  (acquisition  by  any  person  of  major  medical  equipment 
that  includes  magnetic  resonance  imaging  and  lithotripters,  regardless  of  ownership  or  loca- 
tion); 1985  Or.  Laws,  ch.  747,  §  31  (to  be  codified  at  Or.  Rev.  Stat.  §  442.320(l)(b)) 
(acquisitions  of  medical  equipment  exceeding  $1  million  by  any  person);  R.L  Gen.  Laws 
§  23-15-2(k)  (1977)  (acquisition  of  medical  equipment  exceeding  $150,000  by  a  health  care 
provider);  W.  Va.  Code  §§  16-2D-2t,  16-2D-3(h)  (Supp.  1985)  (acquisition  of  major  medical 
equipment  exceeding  $400,000  by  any  person);  Wis.  Stat.  Ann.  §  150.61(3)  (West  Supp. 
1984)  (capital  expenditure  exceeding  $1  million  for  clinical  medical  equipment  by  an  in- 
dependent practitioner  or  medical  group);  Wyo.  Stat.  §§  35-2-202(a)(ix),  205(a)(iii)  (Supp. 
1985);  Drv.  of  Health  &  Medical  Servs.,  Wyo.  Dep't  of  Health  &  Socl\l  Servs.,  Rules 
and  Regulations  Governing  Certificate  of  Need,  ch.  Ill  §§  2,  4  (1985)  (acquisitions 
of  major  medical  equipment  exceeding  $400,000  by  licensed  practitioners'  offices). 


1986]  CERTIFICATE  OF  NEED  1075 

magnetic  resonance  imaging  (MRI)^^^  scanners  in  physician's  offices  and 
other  non-institutional  settings  in  order  to  evade  certificate  of  need 
review. ^'^'^  States  that  did  so  after  September  1982  not  only  breached 
NHPRDA*s  ban  on  extension  of  medical  equipment  coverage  after  that 
date,^'*'  but  they  also  overcame  health  planners'  traditional  reluctance  to 
extend  certificate  of  need  regulation  into  physicians'  offices. 

E.     New  Facilities  and  Acquisitions  of  Existing  Facilities 

Over  half  the  states  cover  construction,  development,  or  establishment 
of  a  new  health  care  facility.  This  coverage  provision  probably  does  not 
trigger  review  of  any  projects  not  otherwise  covered  as  service  or  bed 
additions  or  capital  expenditures.  It  is  possible  that  in  states  with  high 
expenditure  thresholds  and  a  restrictive  list  of  covered  new  services, 
establishment  of  inexpensive,  non-bed  related  facilities  like  home  health 
agencies  and  hospices  might  escape  review  without  such  a  provision. 

NHPRDA  does  not  require  states  to  cover  acquisitions  of  existing 
health  care  facilities  by  individual  persons  or  entities.^'  However,  a 
significant  minority  of  states  appears  to  do  so.  Mississippi  covers  ac- 
quisitions and  forbids  any  person  or  entity  from  acquiring  more  than 
twenty  percent  of  all  skilled  nursing  or  intermediate  care  facility  beds 
in  the  state. ''*^  Nebraska  law  contains  a  similar  prohibition,  applicable 
to  short-term  hospitals  as  well  as  to  nursing  facilities. ^'^  Twelve  other 
jurisdictions  cover  acquisitions  or  transfers  of  ownership  interests  in 
health  facilities. ^^^ 


-"'MRI  is  a  non-radiological  diagnostic  tool  that  uses  magnetic  and  radio  frequency 
fields  to  construct  an  image  of  body  tissue  cind  monitor  body  chemistry. 

-^"The  presence  of  a  certificate  of  need  program  covering  institutional  acquisitions  of 
medical  equipment  tends  to  encourage  the  placement-of  such  equipment  in  non-institutional 
settings.  Hillman  &  Schwartz,  The  Adoption  and  Diffusion  of  CT  and  MRI  in  the  United 
States,  23  Med.  Care  1283  (1985).  Whether  this  represents  a  success  or  a  failing  of 
certificate  of  need  depends  on  one's  calculation  of  the  relative  costliness  and  medical 
appropriateness  of  the  equipment  in  the  two  settings. 

-^'42  U.S.C.  §  300m-6(e)(l)(B)  (1982). 

'^See  supra  note  97  and  accompanying  text. 

-^'Miss.  Code  Ann.  §§  41-7-191(l)(b),  41-7-190  (Supp.   1984-85). 

-^^Neb.  Rev.  Stat.  §§  71-5830(1)  (Supp.   1984). 

-^^D.C.  Code  Ann.  §  32-303(c)  (1981);  Hawaii  Rev.  Stat.  §  323D-43(a)(l)  (Supp. 
1984);  Ky.  Rev.  Stat.  Ann.  §  216B.061(b)  (Supp.  1982);  Me.  Rev.  Stat.  Ann.  tit.  22, 
§  304-A(3)  (Supp.  1984-85);  1985  N.H.  Laws,  ch.  378,  §  378:6  (to  be  codified  at  N.H. 
Rev.  Stat.  Ann.  §  151-C:(II)(b));  N.J.  Stat.  Ann.  §  26-2H-7  (Supp.  1984-85);  Okla. 
Stat.  Ann.  §  2651.1(2)(d)  (Supp.  1984);  S.C.  Code  Ann.  §  44-7-320  (Law.  Co-op  Supp. 
1983);  W.  Va.  Code  §  16-2D-3  (Supp.  1985);  Wis.  Stat.  Ann.  §  150.61(4)  (West  Supp. 
1985);  Ga.  Admin.  Comp.  ch.  272-2,  §§  272-2-.01(17)(b),(g)  (1982)  (coverage  of  capital  ex- 
penditure to  acquire  a  health  care  facility  under  section  1122  and,  for  publicly  owned  or 
operated  facilities,  under  certificate  of  need);  Louisiana  Dep't  of  Health  &  Human 
Resources,  Policies  and  Guidelines  for  Review  of  Capital  Expenditures  5  (1985);  Maine 
Certificate  of  Need  Regulations,  ch.  4,  §  7  (1984). 


1076  INDIANA  LAW  REVIEW  [Vol.  19:1025 

F.  Modifications  in  Certificate  of  Need  Review  Procedures 

As  well  as  reducing  certificate  of  need  coverage  requirements,  states 
have  been  modifying  the  certificate  of  need  review  process.  Some  states 
have  attempted  to  distill  their  review  criteria  down  to  a  few  critical 
considerations.  New  Hampshire,  for  example,  recently  amended  its  law 
to  substitute  the  four  criteria  of  financial  feasibility,  availability  of 
resources,  access,  and  quality  for  its  previous  laundry  list  of  over  twenty 
considerations.'''^  Other  states  have  assigned  priorities  to  their  criteria. ^^^ 

A  recurrent  predicament  for  certificate  of  need  agencies  is  the  receipt 
of  applications  for  new  types  of  equipment  or  services  of  unproven 
clinical  efficacy.  For  example,  planning  agencies  received  numerous  ap- 
plications for  MRI  scanners  well  before  the  Food  and  Drug  Adminis- 
tration had  issued  premarket  approval  for  their  sale.^"*^  Lacking  standards 
on  which  to  base  decisions  in  these  situations,  planning  agencies  have 
tended  either  to  adopt  delaying  tactics  or  to  deny  applications  without 
properly-adopted  criteria,  both  with  disastrous  results;  or  simply  to 
approve  all  applicants. ^'^'^  More  recently,  however,  some  agencies  have 
obtained  authority  to  impose  moratoria  on  review  of  applications  for 
new,  untested  technology  or  to  establish  other  limits  regarding  inno- 
vations. West  Virginia's  statute,  for  example,  empowers  the  state  agency 
to  order  a  ninety-day  moratorium  on  processing  applications  for  new 
medical  technology  when  criteria  and  guidelines  for  evaluating  the  need 
for  the  new  technology  have  not  yet  been  adopted. ^^"  Ohio's  law  au- 
thorizes the  state  agency  to  condition  approval  of  projects  for  tech- 


'"-Compare  1985  N.H.  Laws,  ch.  378,  §  6  (to  be  codified  at  N.H.  Rev.  Stat.  Ann. 
§  151-C:7)  with  N.H.  Rev.  Stat.  Ann.  §  151-C:6  (Supp.  1983);  compare  also  Hawaii 
Rev.  Stat.  §  323D-43(b)  (Supp.  1984)  (review  criteria  of  public  need,  cost  and  cost 
effectiveness,  and  consistency  with  state  health  plan)  with  Hawaii  Rev.  Stat.  §  323D- 
43(b),  (C)(l)-(25)  (Supp.  1983);  Tenn.  Code  Ann.  §  68-11 -106(h)(2)  (Supp.  1985)  (criteria 
of  area- wide  need,  economical  cost,  and  contribution  to  orderly  development  of  adequate 
facilities  and  services)  with  Tenn.  Code  Ann.  §§  68-ll-106(h)(l)(A)-(M)  (Supp.   1983). 

'''E.g.,  Okla.  Stat.  Ann.  §  2652.1(c)  (West  1984)  (planning  agency  authority  to 
establish  relative  weights  of  statutory  certificate  of  need  criteria);  Wis.  Stat.  Ann.  § 
150.69  (West  Supp.  1985)  (cost  containment  identified  as  first  priority  in  applying  criteria). 

-'"Office  of  Health  Planning,  U.S.  Dep't  of  Health  &  Human  Services,  Summary 
Report  of  Responses  to  Nuclear  Magnetic  Resonance  Information  Request,  Program 
Information  Letter  83-23  (1983). 

-'"5^^  Florida  Medical  Center  v.  Department  of  Health  &  Rehabilitative  Servs.,  463 
So.  2d  381  (Fla.  Dist.  Ct.  App.  1985)  (MRI  denial  based  on  unpromulgated  criteria 
reversed);  United  Hosp.  Center,  Inc.  v.  Richardson,  328  S.E.2d  195  (W.  Va.  1985)  (refusal 
to  process  MRI  application  enjoined). 

-^"W.  Va.  Code  §  16-2D-5(0  (Supp.  1985);  see  also  D.C.  Code  Ann.  §  32-314  (1981) 
(authorization  for  120-day  moratorium  on  certificate  of  need  review  of  new  service  if  state 
agency  requires  additional  time  to  develop  and  adopt  criteria);  1985  N.H.  Laws,  ch.  378, 
§  6  (to  be  codified  at  N.H.  Rev.  Stat.  Ann.  §  151-C:4)  (prohibition  on  issuance  of 
certificate  of  need  for  service  for  which  state  agency  has  not  adopted  criteria). 


1986]  CERTIFICATE  OF  NEED  1077 

nologically  innovative  medical  equipment  on  the  applicant's  agreement 
to  supply  the  agency  with  data  to  establish  the  equipment's  clinical 
efficacy."' 

States  with  health  facility  rate  regulation  programs  have  taken  steps 
to  coordinate  the  decisions  of  certificate  of  need  and  rate-setting  agencies. 
Washington,  for  example,  requires  determination  of  the  financial  fea- 
sibility and  cost  impact  of  hospital  certificate  of  need  applications  by 
the  state's  hospital  commission,  a  rate-setting  agency,  and  absent  special 
findings,  mandates  denial  of  an  application  disfavored  by  the  com- 
mission."^ Finally,  planning  agencies  throughout  the  country  are  in- 
creasingly basing  their  certificate  of  need  decisions  on  the  project's 
consistency  with  state  health  plans. ^"^^  In  part  because  certificate  of  need 
decision-making  has  become  more  plan-driven  and  in  part  as  a  result 
of  planning  agencies'  accumulated  experience  with  administrative  adju- 
dication, certificate  of  need  decisions  are  now  seldom  overturned  for 
lack  of  substantive  validity. '^^ 

A  substantial  number  of  states  have  imposed  moratoria  on  some  or 
all  certificate  of  need  applications  or  approvals  in  recent  years.   The 


-^'1984  Ohio  Legis.  Bull,  file  234,  §  1  (Anderson)  (to  be  codified  at  Ohio  Rev.  Code 
Ann.  §  3702.53(E)(5));  see  also  Iowa  Code  Ann.  §  135.64(3)  (Supp.  1985)  (certificate  of 
need  criterion  establishing  special  consideration  for  university  hospitals  with  respect  to 
technologically  innovative  equipment  and  services);  Me.  Rev.  Stat.  Ann.  tit.  22,  §  309(2)(m) 
(1980)  (certificate  of  need  criterion  of  need  for  utilizing  new  technological  developments 
on  a  limited,  experimental  basis);  Wis.  Stat.  Ann.  §  150.63  (West  Supp.  1985)  (certificate 
of  need  exemption  for  research,  development,  and  evaluation  of  innovative  medical  tech- 
nology). 

-^-Wash.  Rev.  Code  Ann.  §  70.38.1 15(2)(d)  (Supp.  1986);  see  also  1985  Wise.  Legis. 
Serv.  29  §  1980p  (West)  (to  be  codified  at  Wis.  Stat.  Ann.  §  150.69d(5))  (hospital 
rate-setting  commission  to  provide  analysis  of  reasonableness  of  certificate  of  need  applicant's 
proposed  costs  and  charges). 

-''E.g.,  Princeton  Community  Hosp.  v.  State  Health  Planning  &.  Dev.  Agency,  328 
S.E.2d  164  (W.  Va.   1985). 

-"^See,  e.g.,  Humana  Medical  Corp.  v.  State  Health  Planning  &  Dev.  Agency,  460 
So.  2d  1295  (Ala.  Civ.  App.  1984)  (area  bed  supply  excess  supports  denial  on  need  and 
cost  containment  criteria);  Humana,  Inc.  v.  Department  of  Health  &  Rehabilitative  Servs., 
469  So.  2d  889  (Fla.  Dist.  Ct.  App.  1985)  (quality  of  care  considerations  supported  need 
methodology  prohibiting  new  cardiac  catheterization  facilities  until  existing  facilities  were 
fully  utilized);  Mercy  Health  Center  v.  State  Health  Facilities  Council,  360  N.W.2d  808 
(Iowa  1985)  (denial  of  application  on  ground  of  cross-subsidization  of  non-health  care 
services  upheld);  In  re  Certificate  of  Need  Application  by  Community  Psychiatric  Centers, 
Inc.,  234  Kan.  802,  676  P. 2d  107  (1984)  (determination  of  need  on  areawide  basis  upheld); 
Beatrice  Manor,  Inc.  v.  Department  of  Health,  219  Neb.  141,  362  N.W.2d  45  (1985) 
(planning  agency  policy  to  encourage  non-institutional  care  justified  denial  of  crowded 
nursing  home's  application  to  add  beds);  Chambery  v.  Axelrod,  101  A.D.2d  610,  474 
N.Y.S.2d  865  (1984)  (certificate  of  need  preference  for  facilities  participating  in  Medicaid 
upheld);  Humana  Hosp.  Co.  v.  Oklahoma  State  Health  Planning  Comm'n,  705  P. 2d  175 
(Okla.  1985)  (lack  of  need  as  measured  by  state  health  plan  formula  justified  certificate 
of  need  denial). 


1078  INDIANA  LAW  REVIEW  [Vol.  19:1025 

primary  reason  for  doing  so  has  been  to  bar  new  services  or  expansion 
in  areas  in  which  state  plans  project  no  community  need  for  an  extended 
period  of  time.  Missouri,  for  example,  has  adopted  a  moratorium  on 
issuance  of  certificates  of  need  for  new  skilled  or  intermediate  care 
nursing  facility  beds  until  July  1,  1988."^ 

Several  states  have  recently  resuscitated  a  proposal  that  was  a  key 
element  in  the  unsuccessful  national  hospital  cost  containment  strategy 
of  the  Carter  administration:  imposition  of  a  ceiling  or  *'cap"  on  the 
total  dollar  value  of  projects  approveable  through  certificate  of  need 
programs  in  a  given  year.^^^  A  capital  ceiling  is  a  mechanism  for  con- 
trolling the  total  level  of  capital  investment  by  health  facilities  for  large 
projects  and  for  compelling  health  planning  agencies  to  weigh  the  relative 
merits  of  disparate  projects.'"  In  the  presence  of  a  "cap,"  projects  for 
remodeling  existing  facilities  compete  with  new  construction,  and  for 
example,  a  new  open  heart  surgery  service  must  vie  with  a  new  renal 
dialysis  unit  for  limited  capital  funds.  By  contrast,  under  conventional 
certificate  of  need  programs,  only  contemporaneously-filed  applications 
for  similar  projects  are  comparatively  reviewed. ^^^  A  statutory  cap  is  in 
operation  in  Rhode  Island  and  Maine. ^^"^  The  Massachusetts  hospital  rate- 
setting  statute  has  a  maximum  on  increases  in  operating  costs  resulting 
from  capital  expenditures.-^^"  Oregon's  law  provides  for  the  establishment 
of  a  non-enforceable  annual  capital  expenditure  target  for  all  hospitals 
in  the  state. ^^' 

VI.     The  Future  of  Certificate  of  Need 

State  certificate  of  need  and  section  1122  capital  expenditure  review 
programs  have  changed  significantly  over  the  two  decades  they  have 


-"Mo.  Ann.  Stat.  §  197.315(1)  (Vernon  Supp.  1985);  see  also  Miss.  Code  Ann.  § 
41-7-191(2)  (Supp.  1985)  (moratorium  on  nursing  home  bed  increases);  1985  Wis.  Legis. 
Serv.  Act  29,  §  1980p  (West)  (to  be  codified  at  Wis.  Stat.  Ann.  §  150.62)  (moratorium 
on  new  hospital  establishment  or  relocation).  See  generally  Office  of  Health  Planning, 
U.S.  Dep't  of  Health  &  Human  Services,  Moratoria:  A  Continuing  Process  in 
Regulatory  Review,  Prog.  Inf.  Letter  85-32  (1985)  (twenty-two  states  imposed  moratoria 
at  some  time  during  1980-85).  For  an  article  reporting  on  the  success  of  a  moratorium 
in  limiting  the  diffusion  of  CT  scanning,  see  Lawthers-Higgins,  Taft  &  Hodgman,  The 
Impact  of  Certificate  of  Need  on  CT  Scanning  in  Massachusetts,  Health  Care  Mgmt. 
Rev.,  Summer  1984,  at  71. 

-""See  D.  Abernathy  &  D.  Pearson,  Regulating  Hospital  Costs:  The  Development 
OF  Public  Policy  90-92  (1979). 

-''See  generally  Institute  for  Health  Planning,  Methods  for  Establishing  Capital 
Expenditure  Limits  (1984). 

-"''See,  e.g.,  Bio-Medical  Applications  of  Clearwater  v.  Department  of  Health  & 
Rehabilitative  Servs.,  370  So.  2d  19  (Fla.  Dist.  Ct.  App.  1979)  (comparative  review  of 
"mutually  exclusive"  kidney  dialysis  center  CON  applications  required). 

-"'Me.   Rev.  Stat.  Ann.  tit.  22,  §  396-k  (Supp.   1985). 

-'-Mass.  Gen.   Laws  Ann.  ch.  6A,  §  32  (West  Supp.   1985). 

-'•'1985  Or.   Laws  ch.  747,  §§  21-24. 


1986]  CERTIFICATE  OF  NEED  1079 

been  in  operation.  They  were  initially  conceived  as  an  adjunct  to  com- 
munity-wide health  planning.  Later,  they  were  seen  as  a  vehicle  for 
implementation  of  federal  health  policy.  Today,  such  programs  appear 
increasingly  tailored  to  fit  narrowly-drawn  individual  state  regulatory 
policies  and  to  compensate  for  specified  market  defects. 

The  persistence  of  certificate  of  need  regulation  in  the  face  of  widely- 
reported  studies  questioning  its  efficacy  and  open  hostility  from  the 
Reagan  administration  may  seem  somewhat  surprising.  However,  research 
on  certificate  of  need  programs  has  universally  assumed  that  cost-con- 
tainment was  the  only  purpose  of  such  programs  (largely  because  cost 
control  became  the  dominant  rationale  for  federal  funding  for  state 
certificate  of  need  by  the  mid-70' s).  This  Article  has  suggested  that  cost 
control  may  be  only  one  of  several  mixed  roles  played  by  state  health 
planning  and  certificate  of  need  programs.  In  addition,  anecdotal  evidence 
at  the  state  level  on  the  impact  of  the  program  on  the  scope  and  direction 
of  hospital  and  other  health  facility  capital  investment  has  never  been 
lacking.  Finally,  there  has  probably  been  a  greater  awareness  at  the  state 
level  than  in  the  federal  government  that  because  certificate  of  need 
programs  require  several  years  to  develop  review  criteria  and  adminis- 
trative procedures  needed  to  function  effectively  and  to  survive  judicial 
scrutiny,  they  could  not  be  evaluated  simply  on  the  basis  of  their  first 
few  years  of  operation. 

A.     Future  State  Participation  in  Certificate  of  Need 

As  indicated  above,  every  state  except  Arizona,  Utah,  and  Texas 
currently  has  some  form  of  health  facility  capital  expenditure  regulation, 
whether  certificate  of  need,  section  1122,  a  moratorium,  or  some  com- 
bination of  these  provisions.  Eight  states'  certificate  of  need  laws  are 
scheduled  to  sunset  essentially  in  their  entirety  in  subsequent  years.  In 
addition,  two  states'  laws  would  expire  if  NHPRDA  were  repealed.'^' 
If  all  the  statutes  scheduled  to  expire  (including  those  linked  to  NHPRDA 
repeal)  did  so  and  no  state  entered  into  a  new  section  1122  contract  or 
adopted  a  moratorium,  thirty-seven  states  and  the  District  of  Columbia 
would  continue  to  have  some  form  of  capital  expenditure  review.  Thirty- 
two  states  and  the  District  of  Columbia  would  have  certificate  of  need 
statutes,  slightly  more  than  had  such  programs  immediately  prior  to  the 
passage  of  NHPRDA. 

What  prompted  the  states  that  repealed  certificate  of  need  programs 
to  do  so?  The  primary  consideration  has  been  recent  changes  in  the 


-"-The  Arkansas  statute  would  automatically  expire  if  NHPRDA  were  to  expire  or 
terminate,  or  if  the  programs  instituted  pursuant  to  NHPRDA  ceased  to  function.  Ark. 
Stat.  Ann.  §  82-2313.1  (Supp.  1983).  The  Colorado  statute  would  sunset  after  the  first 
state  legislative  session  commencing  after  Congress  repealed  the  state  certificate  of  need 
requirements  of  NHPRDA.  Colo.  Rev.  Stat.  §  25-3-521  (1982). 


1080  INDIANA  LAW  REVIEW  [Vol.  19:1025 

sources  of  imperfection  in  the  institutional  health  services  market.  As 
indicated  above,  the  Medicare  program  has  begun  to  substitute  reim- 
bursement at  a  predetermined  rate  for  incur  red-cost  payment,  and  both 
state  Medicaid  programs  and  private  health  insurers  are  following  suit.^^^ 
The  new  prospective  payment  mechanisms,  which  typically  pay  individual 
providers  prior-year  average  costs  incurred  by  all  providers,  offer  a 
disincentive  to  above-average  cost  care  and  an  efficiency  incentive  in  the 
form  of  an  opportunity  to  profit  from  providing  below  average  cost 
care.  There  has  also  been  a  significant  increase  in  patient  enrollment  in 
health  maintenance  organizations  and  other  health  care  delivery  systems 
that  operate  with  internal  incentives  to  reduce  costs,  and  some  evidence 
of  price  competition  among  such  systems  and  between  them  and  con- 
ventional health  insurance. ^^  For  these  and  other  reasons,  utilization  of 
institutional  health  services  has  been  declining,  and  as  with  other  areas 
of  the  economy,  the  annual  rate  of  increase  in  health  care  expenditures 
has  declined.  These  factors,  combined  with  a  general  preference  for 
unregulated  markets  and  exasperation  with  the  controversy  that  often 
surrounds  certificate  of  need  decisions,  seem  to  have  prompted  the 
legislatures  to  repeal  certificate  of  need  statutes. 

Over  half  the  states  repealing  certificate  of  need  hedged  their  bets 
on  deregulation  by  retaining  or  re-entering  the  section  1122  program  or 
adopting  construction  moratoria.  In  these  states  and  others  that  con- 
sidered but  did  not  repeal  certificate  of  need,  there  was  considerable 
concern  that  the  increased  competitiveness  of  the  institutional  health  care 
market  had  not  reached  the  point  at  which  it  would  counteract  still- 
existing  incentives  to  capital  expansion.  An  important  issue  for  states 
was  the  effect  certificate  of  need  repeal  itself  would  have  on  health 
facility  capital  investment  and  construction.  State  legislatures,  especially 
those  concerned  about  current  spending  under  Medicaid  programs,  were 
concerned  with  the  potential  for  a  large  increase  in  spending  immediately 
after  repeal. ^^^  Evidence  from  the  states  that  have  removed  all  restrictions 
on  health  facility  capital  investment  strongly  suggests  that  a  short-term 
surge  does  take  place  when  certificate  of  need  controls  are  lifted. ^^^ 

In  Arizona,  the  certificate  of  need  law  expired  March  16,  1985.^^^ 
In  the  six  months  following,  hospitals  in  Arizona  obtained  licensure 
permits  for  expansion  projects,  formerly  subject  to  certificate  of  need 


^^^See  supra  notes  185-91  and  accompanying  text. 

'''See,  e.g.,  Taylor  &  Kagay,  The  HMO  Report  Card,  5  Health  Aff.  81,  82  (1986). 

-'■'A  small  increase  seems  almost  inevitable,  as  a  consequence  of  implementation  of 
projects  delayed  in  anticipation  of  repeal,  projects  commenced  promptly  in  expectation 
of  reimposition  of  certificate  of  need,  and  the  increased  attractiveness  of  the  state  over 
still-regulated  jurisdictions  to  new  entrants. 

'''See  infra  notes  267-71  and  accompanying  text. 

-"^1984  Ariz.  Sess.  Laws  ch.   1,  §   1. 


1986]  CERTIFICATE  OF  NEED  1081 

review,  with  a  total  cost  of  $135  million.  By  contrast,  for  the  same  six- 
month  period  in  1984,  during  which  certificate  of  need  review  was  in 
effect,  hospitals  were  issued  permits  for  only  $7.5  million  worth  of 
projects. ^^^  A  total  of  674  new  hospital  beds  was  included  in  the  1985 
projects,  and  four  new  open-heart  surgery  services  were  instituted. '^'^ 

Post-repeal  expansion  also  does  not  seem  to  taper  off  after  a  few 
months.  In  Arizona,  certificate  of  need  review  for  nursing  homes  expired 
in  July  1982.  During  the  subsequent  three  and  one-half  year  period, 
the  number  of  facilities  and  beds  in  the  state  increased  at  a  continuous 
rate.  Overall,  the  number  of  nursing  home  beds  in  the  state  increased 
by  51.1%,  compared  to  a  55.8%  growth  in  the  preceding  nine  year 
period  (1974-82)  during  which  certificate  of  need  review  was  in  effect.'^*' 

Post-repeal  expansion  appears  to  be  taking  place  in  Utah  as  well  as 
in  Arizona. ^^'  It  seems  unlikely  that  the  high  level  of  expansion  in 
Arizona  and  Utah  will  continue  over  the  long-term.  However,  the  ex- 
perience in  these  states  does  suggest  that  certificate  of  need  repeal  leads 
to  a  short-term  increase  in  construction  and  expansion  whose  effects 
upon  excess  capacity  and  costs  will  linger  for  years.  It  also  suggests  that 
the  recent  changes  in  health  facility  reimbursement,  utilization,  and 
delivery  have  not  purged  the  institutional  health  care  sector  of  expan- 
sionist tendencies. 

The  dramatic  increases  in  health  facility  capital  spending  in  the  states 
that  have  repealed  certificate  of  need  programs  will  probably  discourage 
a  major  repeal  trend  in  the  remaining  states.  Of  course,  the  fate  of 
state  certificate  of  need  programs  is  likely  to  be  heavily  influenced  by 


^**G.  Heller  &  M.  Chase,  A  Study  of  the  Impact  of  Health  Care  Deregulation 
ON  Hospitals,  Nursing  Homes  and  Health  Services  in  Arizona  242  (report  prepared 
by  Office  of  Planning  and  Budget  Development,  Ariz.  Dep't  of  Health  Services,  Nov. 
15,   1985). 

^^'The  post-repeal  expansion  does  not  appear  to  be  attributable  to  relaxation  of  overly 
restrictive  prior  controls.  In  1984,  Arizona  hospitals  had  a  57.8%  occupancy,  well  below 
national  averages  and  guidelines,  and  an  estimated  excess  capacity  of  2,800  beds.  Arizona 
Statew^ide  Health  Coordinating  Council,  Draft  Arizona  State  Health  Plan,  ch.  10, 
Appendix  A  (1985)  (1984  Arizona  non-federal  hospital  occupancy  rate).  Compare  42  C.F.R. 
§  121.202  (1985)  (National  Guidelines  for  Health  Planning  recommended  non-federal  hospital 
occupancy  rate  of  80%);  American  Hosp.  Ass'n,  Hospital  Statistics  22  (1985)  (1984  U.S. 
non-federal  hospital  occupancy  rate  of  71.9%);  Arizona  Statewide  Health  Coordinating 
Council,  Current  Status/Trends  in  Arizona's  Acute  Care  Nonfederal  Hospital  Beds 
(1984)  (1984  excess  bed  capacity  estimate). 

^'"G.  Heller  &  M.  Chase,  supra  note  268,  at  2. 

-"One  month  after  the  repeal  of  Utah's  certificate  of  need  law  on  December  31, 
1984,  six  new  hospitals,  all  previously  disapproved  under  the  certificate  of  need  law,  were 
under  construction.  Congress  Ends  Federal  Health  Planning,  Medicine  &  Health  Per- 
spectistes  3  (Oct.  6,  1986).  Within  a  few  months  after  repeal,  building  permit  application  had 
been  filed  for  2,800  new  nursing  home  beds.  Telephone  interview  with  Steven  Bonney,  Executive 
Director,  Utah  Health  Systems  Agency,  May  28,  1985. 


1082  INDIANA  LAW  REVIEW  [Vol.  19:1025 

the  status  of  NHPRDA  and  section  1122.  Nevertheless,  it  appears  that 
in  the  forseeable  future,  capital  expenditure  review  will  continue  in  the 
majority  of  states. 

B.     Future  of  State  Certificate  of  Need  Programs 

Since  the  relaxation  of  NHPRDA  requirements  in  1982,  state  cer- 
tificate of  need  programs  have  changed  considerably.  It  is  likely  that 
the  direction  and  pace  of  these  changes  will  continue.  It  seems  likely 
that  to  the  extent  states  use  certificate  of  need  as  a  mechanism  for 
controlling  increases  in  institutional  health  care  costs,  they  will  increas- 
ingly focus  certificate  of  need  review  on  health  facility  expansions  and 
service  additions  that  generate  increased  operating  expenses.  It  is  these 
costs,  not  the  capital  costs  associated  with  such  projects,  that  have  the 
greatest  impact  on  total  costs. ^^^  Consistent  with  this  focus,  one  would 
expect  states  to  increase  capital  expenditure  thresholds,  to  delete  coverage 
of  capital  expenditures  in  any  amount  for  service  additions  or  bed 
increases,  and  to  retain  coverage  of  service  additions  or  expansions 
associated  with  additional  annual  operating  costs.  Exemption  of  the 
various  ambulatory  and  low-intensity  in-patient  facilities  whose  services 
represent  a  fraction  of  total  institutional  health  care  costs  could  also  be 
expected.  The  recently-amended  Indiana  certificate  of  need  law  seems 
to  follow  this  approach  to  an  extent.  All  outpatient  facilities,  including 
ambulatory  surgery  facilities  and  freestanding  hemodialysis  units,  have 
been  deregulated. ^^^  Coverage  is  limited  to  capital  expenditures  exceeding 
$750,000  and  to  certain  bed  capacity  and  category  changes  affecting  beds 
certified  to  participate  in  Medicare  or  Medicaid. ^^'* 

It  also  seems  likely  that  states  will  continue  to  employ  certificate 
of  need  review  as  a  vehicle  for  preserving  quality  of  care  by  restricting 
entry  to  new  services  having  a  reasonable  probability  of  meeting  minimum 
volume  standards.  With  an  increasingly  competitive  institutional  health 
care  environment  and  with  the  potential  for  large  profits  from  at  least 
some  high-intensity,  high-technology  services,  the  rationale  for  this  kind 
of  quality-related  certificate  of  need  regulation  is  as  great  as  ever.^^^  It 


-'-See  supra  note  146  and  accompanying  text. 

-"Ind.  Code  §  16-1-3.3-1  (Supp.  1985).  Indiana's  law  does  not,  however,  provide 
for  coverage  of  new  services  not  associated  with  high  capital  expenditures  but  with  high 
annual  operating  costs,  e.g.,  new  open-heart  surgery  services.  Compare  the  Montana  and 
Wyoming  coverage  patterns  discussed  supra  at  note  215  and  accompanying  text. 

-^^iND.  Code  §   16-1-3.3-1  (Supp.   1985). 

-"The  objection  is  sometimes  raised  that  quality-related  regulation  should  be  the 
domain  of  facility  licensure,  not  certificate  of  need.  But  as  the  creators  of  such  regulatory 
regimens,  states  ought  to  be  free  to  assign  them  such  roles  as  they  please,  irrespective  of 
their  labels.  Health  planning  agencies  have  both  the  technical  tools  and  the  jurisdiction 
to  review  the  expected  utilization  of  newly  proposed  services  through  certificate  of  need 


1986]  CERTIFICATE  OF  NEED  1083 

applies,  however,  only  to  a  limited  set  of  services  which  are  almost 
exclusively  provided  in  a  hospital  setting.  States  adding  the  quality-related 
function  to  certificate  of  need  programs  primarily  focused  on  cost  con- 
tainment can  be  expected  to  include  in  their  coverage  provisions  additions 
of  those  specified  new  services,  regardless  of  capital  or  operating  cost, 
for  which  there  is  a  demonstrable  relationship  between  volume  and  patient 
outcome.  Oregon's  newly  amended  statute,  which  contains  a  $1,000,000 
capital  threshold  and  coverage  of  new  services  that  exceed  the  annual 
operating  cost  threshold  or  are  identified  with  volume-related  quality 
concerns,  exemplifies  this  approach. '^^  Alternatively,  a  state  that  aban- 
doned certificate  of  need  as  a  cost  containment  mechanism  but  wished 
to  maintain  limited  entry  controls  for  quality  of  care  purposes  might 
limit  its  coverage  to  new  hospital  services.  California's  hospital  coverage 
provisions,  which  exempt  all  capital  expenditures  and  service  additions 
except  for  radiation  therapy  units,  burn  centers,  emergency  centers, 
psychiatric  services,  newborn  intensive  care  nurseries,  cardiac  surgery 
units,  and  cardiac  catheterization  units,  may  reflect  this  approach. 

In  recent  years,  a  number  of  states  have  increased  the  role  played 
by  certificate  of  need  review  in  assuring  access  to  institutional  health 
care  by  persons  unable  to  pay,  through  preferential  treatment  of  charitable 
facilities  or  by  outright  indigent  care  quotas. ^^^  This  strategy  has  attracted 
attention  in  other  states.-^"  However,  there  is  even  greater  interest  at 
present  among  the  states  in  programs  that  redistribute  revenues  from 
low  indigent  care  facilities  to  those  treating  a  disproportionate  share  of 
such  patients. ^^"^  Typically,  such  programs  authorize  a  tax  on  hospital 
sales  or  revenues  that  funds  an  indigent  care  account  from  which  facilities 
with  disproportionate  indigent  care  loads  may  draw.^""  These  programs 
may  offer  a  more  precise  matching  of  the  benefits  or  subsidies  to  a 
facility  with  its  indigent  care  burden  than  certificate  of  need  preferences 
or  quotas.  However,  these  programs  may  tend  to  concentrate  indigent 
patients  in  a  limited  number  of  facilities  more  than  certificate  of  need 
preferences  or  quotas  do.  The  redistribution  programs  are  not  inconsistent 


programs,  while  licensing  agencies  have  traditionally  fulfilled  the  role  of  monitoring  the 
ongoing  operations  of  existing  facilities  and  services.  Certificate  of  need  programs  can  do 
little  in  the  way  of  monitoring  facility  operations,  except  through  enforcement  of  licensure 
determinations  in  subsequent  certificate  of  need  proceedings. 

-"'See  supra  note  228. 

'^'See  supra  note  25. 

-''See,  e.g.,  Subst.  S.B.  4403,  48th  Wash.  Legis.,  1984  Reg.  Sess.  §  22(2)(k),  which 
adopted  a  certificate  of  need  requirement  that  each  applicant  meet  or  exceed  the  regional 
average  level  of  charity  care  (subsequently  vetoed  by  the  governor). 

-'"'Academy  for  State  &  Local  Gov't,  Access  to  Care  for  the  Medically  Indigent: 
A  Resource  Document  for  State  and  Local  Ofhcials  54-71  (1985). 

^*°M.  King,  Alternative  Funding  Sources  for  Care  of  the  Medically  Indigent  3  (Nat'l 
Conf.  of  State  Legislatures  1986). 


1084  INDIANA  LAW  REVIEW  [Vol.  19:1025 

with  certificate  of  need  preferences  or  quotas.  Given  the  high  level  of 
public  concern  with  indigent  care  and  the  availability  of  more  direct 
mechanisms  for  increasing  indigent  care  access,  it  seems  unlikely  that 
states  will  make  indigent  patient  access  the  dominant  function  of  cer- 
tificate of  need  programs,  but  equally  likely  that  it  will  continue  to  be 
one  of  several  functions  of  such  programs. 

Employment  of  certificate  of  need  review  as  an  adjunct  to  state 
programs  regulating  or  reimbursing  the  operating  expenses  of  health 
facilities  is  likely  to  continue  as  long  as  states  continue  to  have  such 
programs.  However,  the  number  of  states  with  rate  regulation  programs 
shows  no  signs  of  increasing,  and  numerous  states  have  changed  their 
Medicaid  reimbursement  formulae  in  ways  that  reduce  the  incentives  to 
overinvestment  and  correspondingly  reduce  the  need  for  compensatory 
regulatory  programs. ^^' 

C     The  Future  of  Federal  Health  Planning  Law 

In  the  fall  of  1986,  Congress  finally  reached  the  decision  to  dis- 
continue NHPRDA  funding. ^**^  Congress  also  passed  and  sent  to  the 
President  legislation  that  would  repeal  NHPRDA. ^^^  The  possibility  of 
any  continued  federal  funding  for  state  certificate  of  need  and  capital 
expenditure  review  programs  turns  on  the  outcome  of  the  debate  over 
in-patient  hospital  reimbursement  for  capital  expenditures  under  the 
Medicare  program.  Congress  has  given  itself  until  October  1,  1987,  to 
devise  a  mechanism  for  incorporating  payment  for  such  costs  into  the 
prospective  payment  system.^"*  Even  if  it  does  so.  Congress  could  choose 
to  retain  section  1122  either  as  a  mandatory  or  as  a  state  optional 
program.  However,  if  Congress  succeeds  in  enacting  a  new  capital  reim- 
bursement formula  that  rewards  efficient  operations  and  prudent  in- 
vestment, that  maintains  an  adequate  capital  plant  to  assure  the  long- 
term  availability  of  hospital  services  to  the  increasing  Medicare  popu- 
lation, and  that  satisfies  budget  constraints,  it  is  unlikely  that  fed- 
eral interest  in  supporting  state  regulatory  health  planning  through  sec- 
tion 1122  will  continue.  Congress  might  logically  conclude  that  any  incre- 
ment in  cost-saving  benefits  to  the  Medicare  program  from  state  section 
1122  programs  above  and  beyond  the  cost-containment  incentives 
of  the  prospective  payment  system  would  be  outweighed  by  the  programs' 


^^'See  supra  notes  185-89  and  accompanying  text. 

-■^-Congress'  decision  took  the  form  of  a  refusal  to  include  funding  for  NHPRDA 
Programs  in  the  1987  fiscal  year  continuing  resolution,  terminating  NHPRDA  funding  as 
of  the  end  of  the  1986  fiscal  year  (Oct.  1,  1986).  See  Congress  Ends  Federal  Health  Planning, 
Medicine  &  Health  Perspectives,  Oct.  6,   1986,  at  1. 

"^See  Congress'  Health  Leaders  Agree  to  Health  Legislation  Package,  Medicine  &  Health, 
Oct.  20,  1986,  at  3. 

'«Tub.  L.  No.  98,369,  §  2312(c),  98  Stat.  494  (1984). 


1986]  CERTIFICATE  OF  NEED  1085 

undesirable  enfranchising  effect.  Congress  might  also  conclude  that  the 
benefits  of  state  capital  expenditure  review  programs  (both  in  the  area 
of  cost-containment  and  in  the  quality  of  care  and  access  arenas)  accrue 
primarily  to  states  which,  on  that  account,  ought  to  shoulder  all  or 
most  of  the  cost  of  such  programs. 

Another  alternative  deserves  consideration.  The  section  1122  program 
could  be  retained,  but  put  to  a  different  use.  Federally-funded  health 
planning  had  its  origins  in  planning  for  the  disbursement  of  federal 
health  facility  construction  funds  through  the  Hill-Burton  program. '*^'* 
Today  the  federal  government  no  longer  provides  direct  support  for 
private  health  facility  construction,  even  though  many  of  the  hospitals 
and  other  facilities  built  with  Hill-Burton  monies  are  in  need  of  re- 
placement. ^*^^  Nor  is  it  likely  that  grants  or  loans  for  hospital  construction 
will  be  reinstituted  in  the  forseeable  future.  Instead  the  federal  government 
will  support  health  facility  construction  primarily  through  tax  exemptions 
for  interest  on  certain  bonds  issued  for  health  facility  construction'*^^ 
and  by  Medicare  reimbursement  for  capital  costs.  Both  of  these  supports 
may  be  targeted  for  curtailment  in  the  interest  of  deficit  reduction.  Yet 
it  is  through  the  provision  of  adequate  support  for  health  facility  capital 
investments  that  the  Medicare  program  is  assured  of  the  long-term 
availability  of  an  adequate  supply  of  health  care  facilities  to  meet  the 
needs  of  the  Medicare  population. 

The  Medicare  program  could  employ  the  section  1122  review  process 
to  support  selected  health  care  facilities  in  each  state  and  local  community 
that  are  likely  to  be  needed  in  the  long  run  to  assure  the  availability 
of  services  to  Medicare  beneficiaries.  Health  care  facilities  seeking  to 
make  major  capital  expenditures  for  replacement  or  new  construction 
would  apply  for  approval  under  the  section  1122  process.  ^'^'^  The  review 
would  proceed  as  it  has  in  the  past,  except  that  the  planning  agencies 
would  only  determine  the  need  for  the  proposed  expenditure  to  serve 
the  Medicare  population,  not  the  entire  community  need  for  the  project. 
Facilities  whose  projects  were  identified  as  needed  would  be  entitled  to 
a  Medicare  capital  allowance  in  addition  to  reimbursement  for  operating 
expenses  associated  with  treatment  of  Medicare  patients.  Facilities  not 
identified  as  needed  would  continue  to  be  eligible  to  participate  in 
Medicare  and  to  receive  per-case  payment  for  operating  expenses,  but 
Medicare  funds  would  not  be  given  to  replace  or  expand  their  capital 
plants. 

-""■See  supra  notes  33-37  and  accompanying  text. 

'**Ting  &  Valiante,  Future  Capital  Needs  of  Community  Hospitals,  1  Health  Aff.  14  (1982). 

-•^l.R.C.  §  103(a)(1)  (1985).  See  generally  Capital  Projects,  2  Topics  in  Health  Care 
Financing  (Winter  1975). 

-"'Minor  expenditures,  including  those  associated  with  moveable  equipment  acquisitions, 
could  be  exempted  from  section  1122  review  and  reimbursed  through  a  standard  allowance 
incorporated  into  the  per  case  payment. 


1086  INDIANA  LAW  REVIEW  [Vol.  19:1025 

Under  this  approach,  Medicare  would  selectively  support  major  health 
facility  construction,  much  as  some  state  Medicaid  programs  currently 
contract  with  a  limited  group  of  hospitals  or  other  providers  for  services 
to  Medicaid  beneficiaries,  or  as  Hill-Burton  once  supported  those  facilities 
willing  to  provide  uncompensated  care  and  community  service.  From  a 
predetermined  total  federal  expenditure  for  Medicare  capital  reimburse- 
ment, each  facility  selected  for  capital  payment  under  this  system  could 
receive  more  generous  capital  payment  than  it  would  receive  under  a 
system  paying  for  capital  expenses  in  every  Medicare-participating  facility. 

A  simplified  version  of  this  process  has  been  proposed.  The  Office 
of  Management  and  Budget  has  suggested  that  Medicare  capital  reim- 
bursement to  hospitals  be  limited  to  those  facilities  achieving  eighty-five 
percent  occupancy  rates. ^^'  The  purposes  of  this  approach  are  to  channel 
Medicare  capital  reimbursement  toward  needed  facilities,  to  avoid  payment 
to  underutilized,  unnecessary  facilities,  and  to  permit  more  generous  capital 
payment  within  budget  constraints  by  spreading  payment  over  fewer 
facilities.  While  the  purposes  are  laudable,  a  target  occupancy  rate  is  a 
poor  substitute  for  the  kind  of  multi-factored  determination  of  need 
that  health  planning  programs  can  make.  For  example,  an  eighty-five  percent 
target  occupancy  rate  could  penalize  small  rural  hospitals  that,  although 
their  occupancy  rates  are  low,  are  needed  for  reasons  of  geographical 
access  to  services.  A  high  occupancy  hospital  with  a  low  Medicare  patient 
load  might  be  less  deserving  of  capital  support  than  a  lower  occupancy 
facility  that  treats  many  Medicare  patients.  Finally,  rather  than  en- 
couraging closure  of  excess  beds,  a  target  occupancy  rate  could  create 
an  incentive  to  increase  unnecessary  admissions  and  extend  hospital  stays, 
contrary  to  the  incentives  in  the  per  case  system  of  payment  for  operating 
expenses. 

Using  the  section  1122  process  to  make  the  federal  government  a 
selective  investor  in  health  facility  capital  plants  would  provide  a  legit- 
imate participatory  role  for  capital  expenditure  review  in  a  competitive 
institutional  health  services  market.  It  would  also  reinstitute  health  plan- 
ning as  a  major  federal  vehicle  for  management  of  health  care  delivery. 
Medicare  is  the  nation's  largest  purchaser  of  institutional  health  services 
and  few  health  care  facilities  do  not  participate  in  Medicare.  Using  health 
planning  agencies  operating  through  the  1122  process  as  Medicare's 
purchasing  agents  would  place  health  planning  programs  in  a  central 
role  in  determining  the  allocation  of  health  resources  throughout  the 
country. 

Whether  or  not  federal  funding  continues,  it  appears  that  a  substantial 
number  of  states  will  retain  certificate  of  need  programs,  at  least  in  the 

'"'Wash.  Report  on  Medicine  &  Health,  Dec.  23,  1985,  at  3;  see  also  51  Fed.  Reg.  19,983 
(1986)  (HHS  request  for  comments  on  methods  for  including  adjustment  to  capital  payment 
for  low  occupancy  hospitals). 


1986]  CERTIFICATE  OF  NEED  1087 

near  future.  It  should  be  apparent  that  certificate  of  need  regulation 
continues  to  satisfy  a  wide  range  of  state  policy  roles.  However,  it  also 
appears  that  in  the  absence  of  federal  requirements,  a  significant  number 
of  states  will  abandon  the  program  in  favor  of  efforts  to  promote  more 
competitive  health  service  markets.  This  might  well  be  a  fortuitous 
development.  As  with  any  regulatory  program  that  intervenes  in  the 
market  to  accomplish  some  social  good,  the  necessity  for  certificate  of 
need  programs  ought  to  be  continuously  evaluated,  and  the  scope  of 
the  program  tailored  to  meet  specific,  concrete,  present  purposes.  It  is 
difficult  to  do  this  when  the  states  uniformly  adopt  the  program.  The 
repeal  of  the  program  in  some  jurisdictions  provides  a  natural  experiment 
to  measure  the  impact  of  the  presence  or  absence  of  certificate  of  need 
review  on  the  direction  and  scope  of  health  facility  expenditures. 


1088  INDIANA  LAW  REVIEW  [Vol.  19:1025 

APPENDIX 

SOURCES:  Information  contained  in  the  Tables  and  in  this  Appendix 
has  been  compiled  primarily  from  the  author's  review  of  state  certificate 
of  need  and  section  1122  statutes  and  regulations,  supplemented  by  the 
author's  written  and  telephonic  communications  with  SHPDA  officials, 
U.S.  Department  of  Health  and  Human  Services  officials,  and  various 
secondary  sources. 

EXPLANATORY  NOTES:  The  symbol  "X"  appearing  in  the  Tables  in- 
dicates that  a  particular  health  care  facility  or  project  is  subject  to  cer- 
tificate of  need  review  in  a  given  state.  The  symbol  "N"  appearing  in 
the  Tables  indicates  that  additional  information  regarding  a  state's  coverage 
of  a  particular  facility  or  project  may  be  found  in  the  State-by-State  Com- 
ments section  of  this  Appendix.  An  asterisk  (*)  appearing  in  the  "Capital 
and  Other  Projects"  Table  under  the  coverage  categories  relating  to  bed 
capacity  indicates  that  the  state  covers  the  indicated  bed-related  change 
only  if  it  exceeds  ten  beds  or  ten  percent  of  bed  capacity,  whichever  is 
less,  in  any  two  year  period.  A  dollar  amount  adjacent  to  an  "X"  sym- 
bol in  the  ''Capital  and  Other  Projects"  Table  indicates  that  the  specified 
project  or  expenditure  is  covered  only  if  its  cost  exceeds  the  dollar  amount. 

ABBREVIATIONS  USED  IN  THIS  APPENDIX: 

AOC  =  annual  operating  cost;  CCU  =  coronary  care  unit;  CE  =  capital 
expenditure;  CON  =  certificate  of  need;  HHA  =  home  health  agency; 
ICF  =  intermediate  care  facility;  LF  =  letter  received  from;  ICU  =  in- 
tensive care  unit;  LT  =  letter  sent  to;  MME  =  major  medical  equip- 
ment; NMR  or  MRI  =  magnetic  resonance  imaging;  OAHCF  =  organized 
ambulatory  health  care  facility;  SHPDA  =  State  Health  Planning  and 
Development  Agency;  SNF  =  skilled  nursing  facility;  TCF  =  telephone 
call  from;  TCT  =  telephone  call  to;  10/10/2  =  ten  beds  or  ten  percent, 
whichever  is  less,  in  any  two-year  period;  1122  =  section  1122  program. 

COVERAGE  NOT  SHOWN  IN  THE  TABLES:  The  Tables  are  intended 
to  comprehensively  display  the  facility  and  project  coverage  provisions 
of  state  certificate  of  need  and  section  1122  programs.  A  few  entities 
and  projects  subject  to  review  are  not  shown.  In  the  ''Health  Care 
Facilities,  etc."  Table,  coverage  of  "persons"  is  not  Usted,  although  vir- 
tually all  states  cover  "persons."  The  "Capital  and  Other  Projects"  Table 
does  not  list  the  following  transactions,  covered  under  many  state  CON 
statutes:  (1)  Capital  expenditure  to  acquire  (either  by  purchase  or  under 
lease  or  comparable  arrangement)  an  existing  health  care  facihty  if  the 
person  entering  into  a  contractual  arrangement  for  such  acquisition  does 
not  notify  the  SHPDA  at  least  thirty  days  prior  to  such  contractual 


1986]  CERTIFICATE  OF  NEED  1089 

arrangement  or  if  the  SHPDA  finds  that  the  services  or  bed  capacity  of 
the  faciUty  will  be  changed  in  being  acquired.  (2)  Acquisition  of  major 
medical  equipment  not  owned  by  or  located  in  a  health  care  facility  if 
the  person  entering  into  a  contractual  arrangement  to  acquire  the  equip- 
ment does  not  notify  the  SHPDA  at  least  thirty  days  before  contractual 
arrangements  are  made  to  acquire  the  equipment.  (3)  Capital  expenditures 
not  otherwise  subject  to  review  for  proposed  changes  in  previously- 
approved  projects,  including  cost  overruns,  and  proposed  changes  not 
otherwise  subject  to  review  in  previously-approved  projects. 

DEFINITIONS  OF  TERMS  IN  TABLES: 

1.  Definitions  used  in  "Health  Care  Facilities,  etc."  Table:  State 
CON/1122  statutes  and  regulations  employ  a  variety  of  definitions  and 
terms  to  identify  the  persons  and  entities  subject  to  CON  review.  Usu- 
ally, but  not  invariably,  state  statutes  first  subject  "health  care  facilities" 
to  review  and  then  in  statute  or  regulations  list  and  sometimes  define  the 
various  types  of  facilities  subsumed  under  that  term.  This  Tat  'e  was  com- 
pleted using  a  standard  set  of  health  care  facility  definitions  which  does 
not  duplicate  any  one  state's  coverage  definitions  exactly,  but  which  is 
intended  to  place  comparable  types  of  facihties  in  distinct  categories  for 
comparison  purposes.  Readers  seeking  to  ascertain  whether  a  particular 
project  would  be  subject  to  review  in  a  given  state  are  cautioned  to  con- 
sult the  laws  of  that  state.  The  following  definitions  apply  to  the  Table: 
"Hospital"  means  an  institution  which  primarily  provides  to  inpatients, 
by  or  under  the  supervision  of  physicians,  diagnostic  services  and 
therapeutic  services  for  medical  diagnosis,  treatment  and  care  of  injured, 
disabled,  or  sick  persons,  or  rehabilitation  services  for  the  rehabilitation 
of  injured,  disabled  or  sick  persons.  The  term  includes  psychiatric  and 
tuberculosis  hospitals.  Individual  states  may  enumerate  other  categories 
of  general  and  specialty  hospitals  falling  within  their  definition  of 
"hospital".  "Skilled  nursing  facility"  means  an  institution  or  a  distinct 
part  of  an  institution  which  primarily  provides  to  inpatients  skilled  nurs- 
ing care  and  related  services  for  patients  who  require  medical  or  nursing 
care,  or  rehabiHtation  services  for  the  rehabilitation  of  injured,  disabled, 
or  sick  persons.  The  term  "intermediate  care  facility"  means  an  institu- 
tion which  provides,  on  a  regular  basis,  health-related  care  and  services 
to  individuals  who  do  not  require  the  degree  of  care  and  treatment  which 
a  hospital  or  skilled  nursing  facility  provides,  but  who  because  of  their 
mental  or  physical  condition  require  health-related  care  and  services  (above 
the  level  of  room  and  board).  The  term  "medically-oriented  residential 
care  facilities"  refers  to  inpatient  institutions  providing  room,  board,  and 
personal  care  services,  not  including  continuous  nursing  services,  to  in- 
dividuals who  do  not  require  the  degree  of  care  and  treatment  which  a 
hospital,  skilled  facility,  or  intermediate  care  facility  provides  but  who 


1090  INDIANA  LAW  REVIEW  [Vol.  19:1025 

by  reason  of  illness,  disease,  or  physical  or  mental  infirmity  are  unable 
to  effectively  or  properly  care  for  themselves.  The  states  have  various 
names  for  these  facilities.  The  term  "inpatient  rehabilitation  facility"  means 
an  inpatient  facility  which  is  operated  for  the  primary  purpose  of  assisting 
in  the  rehabilitation  of  disabled  persons  through  an  integrated  program 
of  medical  and  other  services  which  are  provided  under  competent  pro- 
fessional supervision.  The  term  "home  health  agency"  means  a  private 
or  public  agency  or  institution,  not  part  of  another  health  care  facility, 
that  provides  "home  health  services"  as  that  term  is  defined  in  Section 
1861(m)  of  the  Social  Security  Act,  or  a  similar  set  of  services  as  pro- 
vided under  state  law.  The  term  "hospice"  means  a  public  agency  or 
private  organization  not  part  of  another  health  care  facility  that  pro- 
vides "hospice  care"  as  that  term  is  defined  in  Section  1861(dd)  of  the  Soc- 
ial Security  Act,  or  similar  care  as  provided  for  under  state  law.  The  term 
"kidney  dialysis  treatment  center  (including  freestanding  hemodialysis 
units)"  means  a  health  care  facility,  not  part  of  another  health  care  facility, 
which  provides  dialysis  services.  "Health  maintenance  organization  (sub- 
ject to  exemption)"  means  a  public  or  private  organization  that  falls  within 
the  health  maintenance  organization  definition  in  42  U.S.C.  §  300n(8)  or 
a  similar  definition  under  state  law,  and  whose  capital  expenditures  and 
other  projects  are  largely  exempt  from  CON  review  under  state  law.  "Am- 
bulatory surgery  center"  means  a  facility,  not  a  part  of  another  health 
care  facility,  which  provide  surgical  treatment  to  patients  not  requiring 
hospitalization.  The  term  does  not  include  the  offices  of  private  physi- 
cians or  dentists,  whether  for  individual  or  group  practice.  "Organized 
ambulatory  health  care  facilities/outpatient  clinics"  is  a  generic  term  en- 
compassing clinics,  health  centers,  and  independent  facilities  other  than 
ambulatory  surgery  centers,  not  part  of  another  health  care  facility,  which 
are  organized  and  operated  to  provide  general  outpatient  medical  care 
or  specific  types  of  medical  care  to  outpatients.  The  term  does  not  in- 
clude the  offices  of  private  physicians  or  dentists,  whether  for  individual 
or  group  practice.  States  with  broad,  general  provisions  for  coverage  of 
OAHCFs  but  no  breakdown  or  specification  of  the  facilities  included 
thereunder  are  listed  in  this  category  on  the  Table.  A  state  whose  law 
and  regulations  provide  for  both  broad,  general  coverage  of  OAHCFs 
and  express  coverage  of  specified  ambulatory  facilities  will  be  checked 
on  the  Table  both  in  the  "organized  ambulatory  health  care  facilities" 
box  and  in  the  boxes  corresponding  to  the  specific  facilities  covered. 
Some  states  do  not  have  general  coverage  of  OAHCFs  but  do  cover 
some  specified  ambulatory  facilities.  They  are  on  the  Table  accordingly. 
"Freestanding  emergicenter"  means  a  facility,  not  part  of  another  health 
care  facility,  which  is,  or  is  licensed  as,  or  presents  itself  to  the  pubHc 
as,  a  24-hour  facility  to  provide  emergency  or  urgent  medical  care.  "Am- 
bulatory obstetrical  facilities/birthing  centers"  and  "family  planning/abor- 
tion centers"  are  facilities,  not  part  of  another  health  care  facility,  pro- 


1986]  CERTIFICATE  OF  NEED  1091 

viding  some  or  all  such  services.  "Community  health  centers/clinics"  means 
neighborhood  health  centers  and  community  clinics,  not  part  of  another 
health  care  facility,  and  in  any  given  state  may  include  ''community  health 
centers"  faUing  within  the  definition  thereof  in  42  U.S. C.  §  254c,  "migrant 
health  centers"  falHng  within  the  definition  thereof  in  42  U.S.C.  §254b, 
and  "rural  health  clinics"  falling  within  the  definition  thereof  in  42  U.S.C. 
§  254aa(2).  "PubHc  health  center"  means  an  official  agency  established 
by  state  or  local  government,  not  part  of  another  health  care  facility, 
the  primary  function  of  which  is  to  provide  public  health  and  medical 
services.  "Community  mental  health  centers"  means  outpatient  facilities, 
not  part  of  another  health  care  facility,  which  fall  within  the  definition 
of  "community  mental  health  centers"  in  42  U.S.C.  §  2691  (1973)  or  a 
similar  definition  under  state  law  and  includes  facilities  for  treatment  of 
developmental  disabilities,  mental  retardation,  alcohohsm,  drug  abuse, 
chemical  dependency  and  mental  illness.  "Facilities  for  the  provision  of 
outpatient  therapy  services  including  speech  pathology"  means  clinics, 
rehabilitation  agencies,  or  public  health  agencies,  not  part  of  another  health 
care  facility,  which  provide  outpatient  physical  therapy  and  speech 
pathology  services  as  defined  in  42  U.S.C.  §  1395x(p).  "Outpatient 
rehabilitation  facility"  means  a  facility,  not  part  of  another  health  care 
facility,  which  provides  outpatient  rehabilitative  services  and  may  include 
"comprehensive  outpatient  rehabilitation  facilities"  as  the  term  is  defined 
in  42  U.S.C.  §§  1395x(cc). 

2.  Definitions  of  projects  and  capital  expenditures  in  * 'Capital  and  Other 
Projects*'  Table:  State  certificate  of  need  and  section  1122  statutes  and 
regulations  employ  a  variety  of  categories  and  terms  to  identify  the  ex- 
penditures, projects,  and  transactions  subject  to  CON  review.  Usually, 
but  not  invariably,  states  subject  some  combination  of  capital  expenditures, 
additions  of  new  health  services  and  beds,  and  acquisitions  of  major 
medical  equipment  to  review.  Most  states  employ  expenditure  or  annual 
operating  cost  thresholds  (i.e.,  dollar  values  of  the  amount  of  an  expen- 
diture or  major  medical  equipment  acquisition  or  of  the  annual  operating 
costs  associated  with  a  non-capital  expenditure  project  below  which  an 
expenditure  or  project  is  not  covered).  The  Table  was  completed  using 
a  standard  set  of  expenditure,  project,  and  transaction  definitions  which 
may  not  duplicate  any  one  state's  definitions  exactly,  but  which  is  in- 
tended to  place  comparable  types  of  expenditures,  projects,  and  transac- 
tions in  distinct  categories  for  comparison  purposes.  Readers  seeking  to 
ascertain  whether  a  particular  project  would  be  subject  to  review  in  a 
given  state  are  cautioned  to  consult  the  laws  of  that  state. 

Expenditure  and  project  coverage  is  divided  in  the  Table  into  two  broad 
categories:  coverage  of  capital  expenditures  and  coverage  of  projects.  The 
term  "general  purpose  CE/expenditure  threshold"  refers  to  coverage  of 
capital  expenditures  undertaken  by  or  on  behalf  of  health  care  facilities 


1092  INDIANA  LAW  REVIEW  [Vol.  19:1025 

for  any  purpose.  If  the  state  employs  an  expenditure  threshold,  that 
threshold  is  shown.  "CE  for  bed  capacity  increases  and  decreases/expen- 
diture threshold"  refers  to  state  coverage  of  applicable  expenditures  for 
both  increases  and  decreases  in  bed  capacity  of  a  health  care  facility.  If 
an  expenditure  threshold  is  applied  to  such  coverage,  the  threshold  is 
shown.  "CE  for  bed  capacity  increases  only/expenditure  threshold"  is 
self-explanatory.  "CE  for  changes  in  bed  categories/expenditure 
thresholds"  refers  to  state  coverage  of  capital  expenditures  for  redistribu- 
tion of  existing  health  care  facility  beds  among  license  categories  or  other 
services  specified  under  state  law.  If  an  expenditure  threshold  is  applied 
to  coverage  of  such  projects,  the  threshold  is  shown.  "CE  for  additions 
of  health  services/expenditure  threshold"  refers  to  state  coverage  of  capital 
expenditures  by  or  on  behalf  of  health  care  facilities  which  are  associated 
with  additions  of  health  services  which  were  not  offered  by  or  on  behalf 
of  the  facility  within  the  previous  twelve  months.  If  state  coverage  is  depen- 
dent on  an  expenditure  threshold,  the  threshold  is  given;  otherwise  health 
service  additions  are  covered  under  this  category  if  they  are  associated 
with  any  capital  expenditure.  *'CE  for  terminations  of  health  services/ex- 
penditures threshold"  refers  to  coverage  of  capital  expenditures  which  are 
associated  with  the  termination  of  health  services  which  were  previously 
offered  in  or  through  the  facility.  If  state  coverage  is  dependent  on  an 
expenditure  threshold,  the  threshold  is  given  in  otherwise  health  service 
terminations  associated  with  any  CE  are  covered. 

Under  the  listings  for  coverage  of  specified  projects,  "Bed  capacity  in- 
creases and  decreases"  refers  to  coverage  of  both  increases  and  decreases 
in  the  total  number  of  beds  offered  by  or  on  behalf  of  a  health  care 
facility,  regardless  of  whether  the  change  is  associated  with  a  capital  ex- 
penditure. "Bed  category  changes"  refers  to  coverage  of  redistribution 
of  beds  among  various  license  or  other  categories  under  state  law, 
regardless  of  whether  such  redistribution  is  associated  with  a  capital  ex- 
penditure. "Bed  relocations"  refers  to  coverage  of  relocations  of  beds 
from  one  physical  facility  or  site  to  another,  regardless  of  whether  such 
relocation  is  associated  with  a  capital  expenditure.  "Additions  of  new 
health  services/annual  operating  cost  threshold"  refers  to  coverage  of  the 
addition  of  a  health  service  which  was  not  offered  by  or  on  behalf  of 
a  health  care  facility  within  the  previous  twelve  months,  regardless  of 
whether  the  addition  is  associated  with  a  capital  expenditure.  If  coverage 
of  the  health  service  addition  is  provided  for  only  if  the  new  health  service 
will  entail  annual  operating  costs  of  at  least  an  expenditure  minimum  for 
annual  operating  costs,  then  the  Table  indicates  the  state's  annual  operating 
cost  dollar  threshold.  "Termination  of  a  service"  refers  to  a  termination 
of  a  health  service  which  was  offered  in  or  through  a  health  care  facility 
and  which  is  not  associated  with  a  capital  expenditure.  "Acquisitions  of 
major  medical  equipment/equipment  threshold"  refers  to  state  coverage 
of  the  acquisition  by  any  person  of  major  medical  equipment  that  will 


1986]  CERTIFICATE  OF  NEED  1093 

be  owned  by  or  located  in  a  health  care  facility,  or  equipment  that  will 
be  used  to  provide  services  for  hospital  inpatients  on  other  than  a  tem- 
porary basis  in  case  of  national  disaster,  major  accident,  or  equipment 
failure.  If  the  state  employs  an  expenditure  threshold  for  coverage  of 
medical  equipment  acquisitions,  the  threshold  is  shown.  "Construction, 
development,  or  other  establishment  of  new  health  care  facilities"  refers 
to  construction  or  commencing  operation  by  any  person  of  entirely  new 
physical  plants  of  health  care  facilities."  "Acquisition  of  existing  facilities" 
refers  to  the  acquisition  by  any  person  of  the  physical  plant  of  an  ex- 
isting health  care  facility,  or  the  acquisition  of  the  stock  or  assets  of  a 
corporation  or  other  entity  owning  an  existing  health  care  facility.  If  a 
state  specifies  coverage  of  other  projects,  the  projects  are  listed  in  the 
state-by-state  comments. 

STATE-BY-STATE  COMMENTS  TO  TABLES'. 

ALABAMA:  Inpatient  rehabilitation  facilities,  outpatient  rehabilitation 
facilities:  State  law  provides  for  coverage  of  "rehabihtation  centers."  State 
regulations  provide  for  coverage  of  "health  facilities  required  by  federal 
regulations"  (which  would  include  inpatient  rehabilitation  facilities)  and 
"substance  abuse  rehabilitation  facilities"  (which  may  be  inpatient  or  out- 
patient). Other  entities,  persons:  Alabama  covers  facilities  for  the 
developmentally  disabled.  CE  for  other  specified  purpose:  Alabama  statute 
and  regulations  cover  CE  in  excess  of  $245,000  for  AOC.  Coverage  under 
this  provision  unclear.  Additions  of  new  health  services:  Alabama  regula- 
tions contain  a  non-exclusive  list  of  new  services  subject  to  review  (e.g., 
(a)  ambulance  -  air  unit;  (b)  ambulance  -  ground  unit;  (c)  birthing  centers 
and  services;  (d)  nursing  home  services  (ICF  and  skilled  considered  as 
one  service);  (e)  cardiac  catheterization  (adult  or  pediatric);  (f)  angiography 
laboratory;  (g)  cardiopulmonary  laboratory;  (h)  ICU/CCU;  (i) 
hemodialysis;  G)  hyberbaric  chamber;  (k)  organ  transplant;  (1)  organ  bank; 
(m)  open-heart  surgery;  (n)  pulmonary  function  laboratory;  (o)  CT  scan- 
ners (mobile  or  fixed);  (p)  nuclear  medicine  (includes  NMR);  (q) 
megavoltage  radiation  therapy;  (r)  neonatal  intensive  care  (level  II  and 
III);  (s)  pediatric  inpatient  services;  (t)  extracorporeal  lithotresis;  (u) 
rehabihtation  services  (including  physical  therapy,  speech  and  hearing); 
(v)  psychiatric;  (w)  substance  abuse;  (x)  specialty  services  which  have  been 
addressed  in  the  appropriate  state  plan  as  being  properly  allocated  on  a 
regional  basis).  Other  specified  projects:  Alabama  regulations  cover  "plan- 
ning, predevelopmental,  and  developmental  activities  in  excess  of 
$300,000." 

ALASKA:  Other  entities:  Alaska  statute  covers  "federal  hospitals."  CE 
for  bed  supply  increases  and  decreases:  Statute  covers  "CE  in  excess  of 
$1M  for  alteration  of  bed  capacity."  Table  assumes  this  language  pro- 


1094  INDIANA  LAW  REVIEW  [Vol.  19:1025 

vides  for  coverage  of  bed  increases  and  decreases  with  no  10/10/2 
exemption. 

ARIZONA:  General:  Arizona  has  no  CON  statute.  Prior  CON  law  was 
repealed  03/15/85.  It  does  not  have  an  1122  program. 

ARKANSAS:  General:  Arkansas  has  a  certificate  of  need  program  and 
an  1122  program,  apparently  with  identical  coverage.  Hospice:  coverage 
unclear.  Other  outpatient  ambulatory  care  facilities:  Arkansas  also  covers 
"chnical  health  centers,  multidisciphnary  clinics,  specialty  clinics." 

CALIFORNIA:  General:  California  law  provides  various  general  exemp- 
tions from  certificate  of  need  coverage  in  addition  to  the  categorical  ex- 
emptions described  below,  including  an  exemption  for  facilities  providing 
prepaid  health  care,  facilities  providing  certain  volumes  of  free  care,  etc. 
Cahfornia  CON  scheduled  to  sunset  Jan.  1,  1987.  Other  outpatient  am- 
bulatory care  facilities:  California  also  subjects  to  limited  regulation  "free 
clinics",  "psychology  clinics",  "chronic  dialysis  clinics",  and  "employees' 
chnics."  CE  for  other  specified  purposes/expenditure  threshold:  Cahfor- 
nia covers  a  capital  expenditure  in  any  amount  for  a  specialty  clinic 
(surgical,  chronic  dialysis,  or  rehabilitation  clinic)  for  expanded  outpa- 
tient capacity.  California  also  covers  capital  expenditures  in  excess  of 
$1,000,000  for  other  projects  for  a  surgical  chnic  or  rehabilitation  clinic 
and  capital  expenditures  in  excess  of  $1,000,000  for  services,  equipment 
or  modernization  of  a  specialty  clinic  (e.g.,  surgical  clinic,  chronic  dialysis 
clinic,  rehabilitation  clinic).  Bed  capacity  increases:  California  covers  bed 
supply  increases,  and  exempts  a  bed  supply  increase  less  than  ten  percent 
of  licensed  bed  capacity  or  ten  beds  whichever  is  less  in  a  two-year  period 
for  certain  classes  of  health  facilities,  if  certain  occupancy  rate  and  ac- 
cessibility standards  are  met  by  the  facihty.  In  addition,  California  ex- 
empts up  to  two  additions  of  five  SNF  beds  for  a  distinct  part  SNF  of 
a  Primary  Health  Service  hospital  if  certain  occupancy  and  cost  condi- 
tions are  met.  Certain  other  bed  supply  increase  project  exemptions  are 
available  under  California  law.  Bed  category  changes:  California  covers 
conversion  of  beds  from  general  acute,  general  acute  rehabilitative,  skilled 
nursing,  intermediate  care-developmental  disabilities,  intermediate  care- 
other,  acute  psychiatric,  specialized  care,  chemical  dependency  recovery, 
bed  categories  to  skilled  nursing,  psychiatric,  intermediate  care  beds  to 
any  other  category,  except  that  California  exempts  conversion  of  a  general 
acute  care  hospital's  distinct  part  SNF  or  ICF  beds  licensed  as  of  March 
1,  1983  to  other  categories  provided  that  the  conversion  may  not  exceed 
during  any  three-year  period  five  percent  of  the  existing  beds  in  the 
category  to  which  the  conversion  is  made.  California  exempts  use  of  beds 
licensed  in  one  category  for  another  category  of  use  if  such  changes  do 
not  exceed  five  percent  of  total  bed  capacity  at  any  time,  except  that  a 
facility  may  use  an  additional  five  percent  of  its  beds  in  this  manner  if 


1986]  CERTIFICATE  OF  NEED  1095 

seasonal  fluctuations  justify  it.  Health  service  additions:  California  covers 
establishment  of  specified  new  special  services,  e.g.,  radiation  therapy 
department,  burn  center,  emergency  center,  psychiatric  service,  intensive 
care  newborn  nursery,  cardiac  surgery,  cardiac  catheterization  laboratory. 
California  also  covers  establishment  of  certain  special  services  by  a  surgical 
or  rehabilitation  clinic.  Acquisition  of  major  medical  equipment:  Califor- 
nia covers  acquisitions  of  diagnostic  or  therapeutic  equipment  by  primary 
care  clinics,  psychology  clinics,  and  specialty  care  clinics  in  excess  of 
$1,000,000.  Construction,  development  or  establishment  of  new  health  care 
facilities:  Establishment  of  a  new  primary  care  clinic  (e.g.  community  clinic, 
free  clinic,  employees'  clinic),  psychology  cHnic,  and  chronic  dialysis  cHnic 
are  not  subject  to  review.  Also  exempt  are  conversion  of  an  existing  spec- 
ialty clinic  to  a  primary  care  clinic  or  conversion  of  a  primary  care  clinic 
from  one  licensure  category  to  another.  Other  specified  projects:  Califor- 
nia covers  conversion  of  an  entire  existing  hospital,  SNF,  or  ICF  from 
one  hcensure  catagory  to  another.  California  covers  conversion  of  a 
primary  chnic  (community,  free,  employees'  clinic)  to  a  specialty  clinic 
(surgical,  chronic  dialysis,  rehabilitation  clinic).  California  covers  conver- 
sion of  a  specialty  chnic  from  one  category  to  another.  California  covers 
a  project  by  a  health  facility  for  expanded  outpatient  surgical  capacity. 
Cahfornia  covers  relocation  of  a  hospital,  SNF,  ICF,  or  specialty  clinic - 
(surgical  chnic,  chronic  dialysis  chnic,  rehabilitation  chnic)  to  a  different 
or  adjacent  site. 

COLORADO:  General:  Colorado's  CON  law  underwent  minor  amend- 
ment in  1985.  Kidney  disease  treatment  centers,  ambulatory  surgery  centers, 
freestanding  emergicenters:  The  capital  and  other  projects  by  or  on  behalf 
of  these  facilities  which  are  subject  to  review  are  limited  to  capital  expen- 
ditures regardless  of  purpose  in  excess  of  the  capital  expenditure  threshold. 
Facilities  for  the  provision  of  outpatient  therapy  services  including  speech 
pathology:  No  such  projects  have  been  proposed  and  it  is  unclear  whether 
they  would  be  subject  to  review.  LF  SHPDA  1/84.  Other  ambulatory 
care  facilities:  Colorado  covers  * 'facilities  for  the  mentally  retarded," 
'*habilitation  centers  for  brain-damaged  children,"  and  "pilot  project 
rehabilitative  nursing  facilities."  General  purpose  CE/ expenditure 
threshold:  Colorado's  general  purpose  capital  expenditure  threshold  covers 
expenditures  in  excess  of  $2,000,000  for  "provision  of  clinically-related 
health  care  services"  and  excludes  expenditures  for  a  set  of  specified  non- 
clinical services.  Capital  expenditures  for  additions  of  health  services /ex- 
penditure threshold:  Colorado  covers  capital  expenditures  in  excess  of 
$1,000,000  to  "create  or  change"  health  services.  CE  for  other  specified 
purposes /expenditure  threshold:  Colorado  covers  the  replacement  of  beds 
exceeding  the  capital  expenditure  threshold.  Bed  supply  increases  only, 
bed  category  changes  and  bed  relocations:  Colorado  covers  bed  supply 
increases,  category  changes,  and  relocations  in  excess  of  twenty  beds  over 


1096  .  INDIANA  LAW  REVIEW  [Vol.  19:1025 

a  two-year  period.  Other  entities,  persons,  other  specified  projects:  Col- 
orado covers  expenditures  for  major  medical  equipment  by  or  on  behalf 
of  any  person  in  excess  of  $1,000,000  to  provide  "clinically  related  health 
care"  which  includes  equipment  not  located  in  or  providing  services  to 
inpatients  of  a  hospital. 

CONNECTICUT:  General:  Connecticut  amended  its  CON  law  in  1985. 
Inpatient  rehabilitation  facilities,  ambulatory  surgical  facilities,  organized 
ambulatory  health  care  facilities:  Coverage  unclear.  Other  entities,  per- 
sons: Connecticut  covers  '^coordination,  assessment  and  monitoring  agen- 
cies," student/faculty  infirmaries,  and  "homemaker  home  health  aide  agen- 
cies." Bed  capacity  increases  and  decreases:  Connecticut  statute  expressly 
covers  only  substantial  decrease  in  total  bed  capacity.  Bed  supply  increases 
are  apparently  included  under  statutory  health  service/function  addition 
coverage.  Additions  of  new  health  services:  Connecticut  covers  additions 
of  health  services  or  functions,  except  additions  of  ambulatory  services 
by  HMOs,  by  all  health  care  facilities  or  institutions  (including  state  health 
care  facilities  or  institutions)  except  home  health  care  agencies,  homemaker- 
home  health  aide  agencies,  and  coordination,  assessment,  and  monitoring 
agencies.  Other  specified  projects:  Connecticut  covers  transfer  of  owner- 
ship or  control  of  a  health  care  facility  or  institution  (except  home  health 
care  agencies  and  homemaker  home  health  aide  agencies)  prior  to  initial 
licensure.  Connecticut  covers  increases  in  coordination,  assessment,  and 
monitoring  agency  staffing  by  a  specified  percentage.  Connecticut  covers 
the  termination  of  its  Medicaid  provider  agreement  by  a  nursing  home. 
Other  entities,  persons,  other  specified  projects:  Connecticut  covers  ex- 
penditures by  any  person  in  excess  of  $400,000  to  acquire  "imaging  equip- 
ment" which  will  not  be  owned  by  or  located  in  a  health  care  facility. 

DELAWARE:  General:  Delaware  has  certificate  of  need  and  1122.  Tables 
show  CON  coverage.  Other  entities:  Delaware  covers  independent  blood 
banks.  Other  specified  projects:  Delaware  covers  pre-development  expen- 
ditures in  excess  of  $50,000. 

DISTRICT  OF  COLUMBIA:  General:  The  D.C.  CON  law  underwent 
minor  amendment  in  1985.  Health  care  facilities  subject  to  review:  The 
District  of  Columbia  covers  health  care  facilities  only  if  they  have  an  an- 
nual operating  budget  of  at  least  $250,000.  Other  entities,  persons:  D.C. 
covers  diagnostic  health  care  facilities.  CE  for  other  specified  purposes /ex- 
penditure threshold:  D.C.  covers  capital  expenditures  intended  to  permit 
the  increase  of  patient  load  or  units  of  service  by  forty  percent  over  pre- 
sent capacity  and  capital  expenditures  to  permanently  close  a  health  care 
facility.  Additions  of  new  health  services /annual  operating  cost  threshold: 
D.C.  regulations  appear  to  provide  for  coverage  of  new  health  services 
both  regardless  of  annual  operating  cost,  and  if  they  exceed  an  annual 
operating  budget.  Other  entities,  persons,  other  specified  projects:  D.C. 


1986]  CERTIFICATE  OF  NEED  1097 

covers  acquisition  of  MME  with  a  fair  market  value  in  excess  of  $400,000 
by  or  on  behalf  of  physicians,  dentists,  or  other  individual  providers  of 
individual  group  practice. 

FLORIDA:  General:  Florida  CON  law  underwent  minor  amendment  in 
1985.  Portions  of  Florida  CON  law  sunset  in  1987.  Home  health  agency: 
HHA  coverage  limited  to  HHAs  certified  or  seeking  certification  as  a 
Medicare  home  health  services  provider.  Project  coverage  limited  to 
establishment  of  a  new  HHA.  Bed  capacity  increases  and  decreases:  Florida 
covers  increases  in  bed  supply  and  any  change  in  the  number  of  psychiatric 
or  rehabilitation  beds.  Bed  category  changes:  Florida  covers  bed  category 
conversions  only  between  SNF  and  ICF  beds,  and  only  if  the  conversion 
exceeds  10/10/2,  unless  the  facility  is  licensed  for  both  SNF  and  ICF. 
Other  specified  projects:  Florida  covers  conversion  from  one  type  of  health 
care  facility  to  another  and  transfer  of  a  CON. 

GEORGIA:  General:  The  Georgia  CON  law  was  amended  in  1985.  Georgia 
has  CON  and  1122.  Facilities  and  projects  identified  as  covered  on  Tables 
may  be  covered  under  either  or  both  CON  and  1122.  Medically-oriented 
residential  care  facilities:  Georgia  covers  only  "personal  care  homes"  not 
in  existence  on  the  effective  date  of  the  CON  statute.  Family  plan- 
ning/abortion centers /clinics:  Only  abortion  centers  covered.  Acquisition 
of  existing  facilities:  Reviewable  only  under  the  state's  1122  program,  ex- 
cept that  acquisitions  of  publicly  owned  and  operated  health  care  facilities 
subject  to  CON  review.  Bed  capacity  increases  only:  Georgia  exempts  bed 
supply  increases  less  than  ten  beds  or  ten  percent  of  bed  capacity, 
whichever  is  less,  in  any  two-year  period  if  the  facility  occupancy  rate 
in  the  preceding  year  is  more  than  eight-five  percent.  Other  specified  pro- 
jects: Georgia  covers  conversion  or  upgrading  of  a  health  care  facility  not 
previously  subject  to  review  under  the  CON  law  to  a  health  care  facility 
subject  to  review. 

HAWAII:  Medically-oriented  residential  care  facilities:  Coverage  unknown. 
Other  outpatient  ambulatory  care  facilities:  Hawaii  also  covers  centers  for 
dental  surgery;  dental  clinics;  cosmetic  surgery  centers;  any  provider  of 
medical  or  health  services  organized  as  a  not-for-profit  or  business  cor- 
poration other  than  a  professional  corporation;  and  any  provider  of 
medical  or  health  services  which  describes  itself  to  the  public  as  a  "center," 
"clinic"  or  by  any  name  other  than  the  name  of  one  or  more  of  the 
practitioners  providing  these  services.  CE  for  other  specified  purposes: 
Hawaii  covers  capital  expenditures  in  excess  of  $600,000  for  acquisition 
of  existing  health  care  facilities.  Termination  of  a  health  service:  Hawaii 
covers  terminations  but  exempts  service  terminations  by  a  health  care  facil- 
ity that  is  ceasing  its  entire  operation.  Acquisitions  of  major  medical  equip- 
ment: Hawaii  has  a  $250,000  threshold  for  acquisitions  of  new  medical 
equipment  and  a  $400,000  threshold  for  replacement  of  medical  equip- 


1098  INDIANA  LAW  REVIEW  [Vol.  19:1025 

ment.  Other  specified  projects:  Hawaii  covers  change  of  location  of  a 
health  service.  Other  entities,  persons,  acquisition  of  MME:  Hawaii  covers 
acquisitions  of  MME  by  offices  of  physicians,  dentists,  or  other  practi- 
tioners of  the  heahng  arts. 

IDAHO:  General:  Idaho  has  an  1122  program,  but  no  CON  program. 
Table  displays  1122  coverage.  Other  specified  projects,  CE  for  other 
specified  purposes:  Idaho  covers  development  of  a  new  facility,  and  a 
capital  expenditure  for  development  of  a  new  facility,  which  will  result 
in  the  addition  of  new  licensed  beds. 

ILLINOIS:  General:  Portions  of  the  Illinois  CON  law  are  scheduled  to 
sunset  Jan.  1,  1986.  Addition  of  new  health  services /annual  operating 
cost  threshold:  Illinois  covers  additions  of  the  following  services  if  their 
annual  operating  costs  exceed  the  threshold:  blood  bank;  diagnostic  im- 
aging; emergency  services;  laboratory;  occupational  therapy;  outpatient 
ambulatory  care;  pharmacy;  physical  therapy;  respiratory  therapy;  and 
surgery.  Additions  of  the  following  services  are  covered  regardless  of  cost: 
acute  mental  illness;  alcoholism  treatment;  burn  treatment;  cardiac 
catheterization;  computer  systems;  end  stage  renal  disease;  intensive  care; 
medical-surgical;  non-hospital  based  ambulatory  surgery;  obstetrical  ser- 
vices; open  heart  surgery;  pediatric  services;  perinatal-high  risk;  radiation 
therapy;  rehabilitation  services.  Other  specified  projects:  Illinois  covers 
discontinuation  of  a  health  care  facility. 

INDIANA:  General:  Indiana's  CON  law  was  amended  in  1985.  Indiana 
CON  law  sunsets  June  30,  1987.  Skilled  nursing  facilities  and  intermediate 
care  facilities:  Indiana  exempts  CE  by  or  on  behalf  of  health  care  facilities 
for  SNF/ICF  beds  which  are  not  certified  to  participate  in  Medicare  or 
Medicaid.  Kidney  disease  treatment  centers  (including  freestanding 
hemodialysis  units):  Indiana  does  not  cover  freestanding  hemodialysis  units. 
CE  for  changes  in  bed  category:  Indiana  covers  changes  in  health  care 
facility  bed  category  from  any  category  to  certified  long-term  care 
SNF/ICF  beds.  Indiana  covers  changes  in  Medicaid-certified  hospital  or 
SNF/ICF  beds  to  Medicaid-reimburseable  ICF/mentally-retarded  beds. 
Other  specified  projects:  Indiana  covers  the  appUcation  of  a  SNF  or  ICF 
for  certification  to  participate  in  Medicare  or  Medicaid. 

IOWA:  General:  Iowa  has  CON  and  1122.  Entities  and  projects  iden- 
tified as  covered  in  Tables  may  be  covered  under  either  1122  or  CON 
or  both.  Freestanding  emergicenter;  birthing  center;  public  health  center, 
outpatient  physical  therapy  center:  The  state  CON  statute  provides  for 
coverage  of  "organized  outpatient  health  facilities,"  (defined  as  "a  facility, 
not  part  of  a  hospital,  organized  and  operated  to  provide  health  care  to 
noninstitutionalized  and  non-homebound  persons  on  an  outpatient  basis; 
it  does  not  include  private  offices  or  clinics  of  individual  physicians,  den- 
tists, or  other  practitioners,  or  groups  of  practitioners  who  are  health  care 


1986]  CERTIFICATE  OF  NEED  1099 

providers").  State  regulations  have  defined  this  to  include,  but  not  be 
limited  to,  "family  planning  cUnics,  neighborhood  health  centers,  com- 
munity mental  health  centers,  drug  abuse  or  alcoholism  treatment  centers, 
and  rehabilitation  facilities."  According  to  the  SHPDA,  whether  or  not 
emergicenters,  birthing  centers,  public  health  centers,  and  outpatient 
physical  therapy  centers  would  be  covered  would  depend  upon  the  pro- 
posed facilities'  relationship  to  a  hospital,  if  any;  the  services  to  be  pro- 
vided by  the  facility  and  whether  such  services  constitute  "health  care"; 
and  the  facilities'  characteristic  as  a  private  office  or  clinic  of  a  practi- 
tioner or  a  group  of  practitioners.  LF  SHPDA  2/84.  Bed  capacity  in- 
creases and  decreases:  CON  statute  and  regulations  could  be  read  not  to 
cover.  LF  SHPDA  2/84  indicates  state  does  review  permanent  changes 
in  bed  capacity  whether  the  changes  result  in  the  addition  or  deletion  of 
beds.  1122  coverage  parallels  CON  coverage  under  "election  not  to  review" 
regulation.  Other  specified  projects:  Iowa  covers  relocation  of  a  health 
care  facility,  relocation  of  one  or  more  health  services  from  one  physical 
facility  to  another.  Other  entities,  persons,  other  specified  projects:  Iowa 
covers  expenditure  by  or  on  behalf  of  individual  health  care  provider  or 
group  of  providers  in  excess  of  $400,000  for  MME  to  be  installed  in  a 
private  office  or  clinic. 

KANSAS:  General:  The  Kansas  CON  statute  sunsetted  July  1,  1985.  Kan- 
sas has  a  statutory  moratorium  on  new  hospital  construction  and  addi- 
tions or  relocations  of  hospital  beds  through  July  1,   1986. 

KENTUCKY:  General:  Kentucky  has  CON  and  1122.  Facilities  and  pro- 
jects identified  in  Tables  may  be  covered  under  either  or  both  programs. 
Public  health  centers:  Kentucky  covers  capital  expenditures  in  excess  of 
the  threshold  by  county  and  district  health  departments  and  establishment 
by  such  departments  of  health  services  for  which  there  are  separate  licen- 
sure categories,  e.g.  primary  care  centers  or  home  health  agencies.  CON 
not  required  to  estabhsh  traditional  "public  health"  services.  LF  SHPDA 
2/84.  Addition  of  a  new  health  service/annual  operating  cost  threshold: 
Kentucky  covers  health  service  additions  exceeding  an  AOC  threshold  and 
also  covers  additions  of  health  services  subject  to  licensure  or  for  which 
there  is  a  component  of  the  SHP  without  regard  to  annual  operating  costs. 
The  services  in  the  SHP  are:  acute  care  services;  open  heart  surgery,  car- 
diac catheterization,  radiation  therapy  which  utilizes  mega-voltage  equip- 
ment, ESRD  services,  CT  scanners,  NMR,  long-term  care  services.  Ac- 
quisitions of  existing  facilities:  Acquisitions  of  hospitals,  SNFs,  ICFs, 
kidney  disease  treatment  center  including  freestanding  hemodialysis  units, 
and  ambulatory  surgical  facilities  subject  to  1122  review  only  if  associated 
with  capital  expenditure  in  excess  of  $100,000.  LF  SHPDA  2/84.  Other 
specified  projects:  Kentucky  requires  CON  to  alter  the  geographic  service 
area  which  has  been  designated  on  a  certificate  of  need  or  license,  and 
to  transfer  a  CON  for  establishment  of  a  new  facility  or  replacement  of 
an  existing  facility. 


1100  INDIANA  LAW  REVIEW  [Vol.  19:1025 

LOUISIANA:  General:  Louisiana  has  a  Section  1122  program.  Although 
it  does  not  have  a  certificate  of  need  law,  it  does  have  a  statutory  pro- 
gram of  new  home  health  agency  Hcensure  requiring  a  determination  of 
need  for  the  new  home  health  agency  by  the  designated  planning  agency. 
Home  health  agency:  Louisiana's  home  health  agency  coverage  is  limited 
to  establishment  and  licensure  of  new  HHA.  Other  specified  projects:  Loui- 
siana covers  relocation  of  a  previously  approved  and  licensed  facility  within 
the  same  service  area. 

MAINE:  General:  Maine  CON  law  was  amended  in  1985.  Maine  has  CON 
and  1122.  It  elects  not  to  review  under  1122  projects  not  reviewed  under 
CON.  CE  for  other  specified  purpose:  Maine  covers  a  capital  expenditure 
in  excess  of  $350,000  for  purchase  or  other  acquisition  of  a  health  care 
facility.  Bed  capacity  increases  and  decreases:  Maine  covers  increases  and 
decreases  in  licensed  bed  capacity  by  more  than  five  beds  or  ten  percent, 
whichever  is  less,  in  any  two-year  period.  Bed  category  change:  Maine 
covers  increases  or  decreases  in  the  number  of  beds  licensed  in  particular 
levels  of  care  by  more  than  five  beds  or  ten  percent,  whichever  is  less,  in 
any  two-year  period.  Bed  relocations:  Maine  covers  relocations  of  bed 
by  more  than  five  beds  or  ten  percent  of  bed  capacity,  whichever  is  less, 
in  any  two-year  period.  Additions  of  new  health  services/annual  operating 
cost  threshold:  Maine  covers  additions  of  health  services  with  annual 
operating  costs  in  excess  of  the  threshold.  It  also  covers  the  addition  of 
any  new  health  service  (except  an  organized  outpatient  facility)  without 
regard  to  cost.  It  also  covers  addition  of  the  following  services  if  the  pro- 
posed addition  duplicates  a  service  presently  offered  in  the  proponent's 
service  area:  alcohol  rehabilitation  (inpatient  or  outpatient);  medical-surgical 
(adult)  (where  converted  from  psychiatric  beds);  rehabilitation  (inpatient 
or  outpatient);  and  speech  pathology.  Other  entities,  other  specified  pro- 
jects: Maine  regulations  provide  for  coverage  of  the  acquisition  by  any 
person  of  NMR  scanning  equipment  that  is  to  be  used  to  provide  services 
to  persons  other  than  hospital  inpatients. 

MARYLAND:  General:  Maryland  exempts  certain  projects  to  close  all 
or  part  of  a  hospital.  Maryland's  CON  law  was  amended  in  1985.  General 
purpose  CE:  Maryland  exempts  CE  for  site  acquisitions,  acquisitions  of 
business  or  office  equipment  not  directly  related  to  patient  care  and  CE 
to  the  extent  they  are  directly  related  to  acquisition  and  installation  of 
MME.  Maryland  also  exempts  certain  CE  made  as  part  of  a  health  facil- 
ity merger,  consolidation,  or  conversion  to  non-health  related  use.  It  covers 
CE  for  predevelopment  activities.  CE  for  other  specified  purpose: 
Maryland  covers  capital  expenditures  which  result  in  any  increase  or 
decrease  in  the  volume  of  one  patient  service  where  over  a  two-year  period 
the  change  is  twenty- five  percent  or  more  of  that  volume.  Maryland  covers 
CE  that  result  in  a  substantial  change  in  the  bed  capacity  of  a  health 
care  facility.  Bed  capacity  increases  and  decreases:  Maryland  exempts  cer- 


1 986]  CER  TIFICA  TE  OF  NEED  1101 

tain  bed  capacity  changes  undertaken  pursuant  to  a  health  facihty  merger, 
consohdation,  or  conversion  to  non-health  related  use.  Addition  of  new 
health  service:  Maryland  exempts  additions  of  new  health  services  with 
annual  operating  revenue  exceeding  the  threshold  if  such  revenue  is  en- 
tirely associated  with  the  use  of  medical  equipment.  Acquisition  of  MME: 
Maryland  has  a  program  of  licensure  of  major  medical  equipment  in  ex- 
cess of  $600,000  used  to  provide  health  services  acquired,  leased,  operated, 
or  received  by  any  person.  The  program  uses  review  criteria  and  stan- 
dards similar  to  those  used  under  CON,  but  is  separate  from  the  state's 
CON  program.  Construction,  development,  or  other  establishment  of  new 
health  care  facilities:  Maryland  covers  establishment  of  new  health  care 
facilities,  relocation  of  an  existing  health  care  facility  to  a  new  site,  and 
complete  replacement  of  an  existing  facility  on  the  same,  contiguous,  or 
adjacent  site.  Other  specified  projects:  Maryland  covers  the  addition  of 
an  HHA  branch  office  by  an  existing  HHA  or  home  health  service, 
establishment  of  an  HHA  or  home  health  service  in  a  new  location  by 
an  existing  HHA,  or  transfer  of  ownership  of  an  HHA  branch  office 
or  service.  Maryland  covers  changes  in  the  number  of  kidney  dialysis  sta- 
tions of  a  health  care  facility.  Maryland  covers  any  increase  or  decrease 
in  magnitude  of  any  single  patient  service  over  a  two-year  period,  other  than 
change  in  bed  capacity,  by  which  the  facility  plans  to  change  the  volume 
of  the  service  by  twenty-five  percent  or  more.  For  determination  of  percen- 
tage of  planned  change,  the  volume  of  service  shall  be  that  unit  which  is  nor- 
mally measured  for  the  service,  and  shall  be  for  the  last  prior  annual 
recording  period  used  by  the  facility.  Certain  services  volume  changes 
undertaken  pursuant  to  facility  merger,  consolidation,  or  conversion  to 
non-health  related  uses  are  exempted. 

MASSACHUSETTS:  Freestanding  emergicenters:  "Clinic"  definition  in 
Mass.  regulations  appears  to  include  emergicenters  and  bring  them  within 
CON.  Other  entities:  Massachusetts  covers  institutions  for  care  of  unwed 
mothers  and  clinical  laboratories.  Bed  capacity  increases  only: 
Massachusetts  exempts  one-time  increases  of  four  beds  or  a  series  of  in- 
creases in  bed  capacity  up  to  four  beds,  except  in  intensive  care,  cor- 
onary care,  neo-natal  intensive  care,  or  renal  dialysis  beds  and  so  long 
as  the  capital  expenditure  required  for  the  increase  or  increases  does  not 
exceed  $150,000.  Addition  of  health  services/annual  operating  cost 
threshold:  Massachusetts  covers  the  addition  of  major  services  (e.g.,  any 
service  in  the  acute  services,  chronic  rehabilitation,  and  mental  health  ser- 
vices categories,  and  establishment  of  a  satellite  clinic  or  unit  of  a  facil- 
ity) without  regard  to  annual  operating  cost.  Other  service  additions  are 
covered  if  they  exceed  an  annual  operating  threshold  of  $250,000.  Ac- 
quisitions of  existing  facilities:  Massachusetts  regulations  indicate  that  ac- 
quisition of  an  existing  health  care  facility  by  another  health  care  facility 
is  covered  as  a  substantial  change  in  services  of  the  acquiring  facility. 


1102  INDIANA  LAW  REVIEW  [Vol.  19:1025 

In  addition,  transfers  of  ownership  of  a  health  care  facility  require  a  find- 
ing of  need  for  the  facility  at  the  proposed  location  by  the  state  depart- 
ment of  health.  Other  specified  projects:  Conversion  of  an  entire  facility 
from  one  licensure  category  to  another  is  covered. 

MICHIGAN:  General:  Michigan  has  CON  and  1122.  Facilities  and  pro- 
jects identified  in  Tables  may  be  covered  under  either  or  both  programs. 
Home  health  agencies:  State  CON  statute  provides  that  HHAs  will  be 
covered  once  HHAs  are  licensed  in  the  state.  Other  entities:  Michigan 
covers  clinical  laboratories.  Bed  category  changes:  Michigan  covers  bed 
category  changes  that  result  in  an  increase  or  decrease  in  beds  in  an 
obstetrical  department,  long-term  care  unit  or  psychiatric  unit. 

MINNESOTA:  General:  Minnesota  does  not  have  a  certificate  of  need 
law.  State  law  places  a  moratorium  on  all  new  hospital  construction  and 
construction  or  modification  by  or  on  behalf  of  a  hospital  that  increases 
bed  capacity,  relocates  beds  from  one  physical  facility  or  to  another,  or 
otherwise  results  in  an  increase  or  redistribution  of  bed  capacity,  with 
certain  exceptions  through  June  30,  1987.  Minnesota  has  an  1122  pro- 
gram, and  elects  not  to  review  or  non-substantively  reviews  most  projects. 

MISSISSIPPI:  General:  Mississippi  CON  law  amended  in  1985.  Mississippi 
CON  scheduled  to  sunset  July  1,  1986.  Bed  capacity  increases,  CE  for 
bed  capacity  increases,  CE  for  bed  category  changes,  CE  for  bed  reloca- 
tions: Bed-related  coverage  after  1985  amendments  unclear.  The  statute 
covers  bed  relocations  of  more  than  ten  beds  or  ten  percent  over  a  two- 
year  period  specified  by  the  state  agency  with  a  CE  below  $150,000,  bed 
conversions  ''of  the  total  bed  capacity  of  a  designated  licensed  category 
or  sub-category  of  any  health  care  facility"  with  a  similar  10/10/2  and 
a  CE  below  $150,000,  and  alteration,  refurbishing,  or  modernizing  of  a 
unit  or  department  where  such  beds  are  located  with  a  CE  under  $150,000. 
Not  clear  if  the  foregoing  transactions  would  be  covered  when  associated 
with  a  CE  exceeding  $150,000.  Additionally,  bed  capacity  additions  not 
clearly  covered,  although  legislative  intent  to  cover  them  is  apparent  in 
statutory  moratorium  on  CONs,  which  exempts  certain  bed  additions. 
Other  specified  projects:  Mississippi  covers  relocation  of  a  health  care 
facility,  or  portion  thereof,  or  major  medical  equipment,  or  relocation 
of  a  health  care  service  from  one  site  to  another.  Mississippi  covers  ac- 
quisition of  MME  exceeding  threshold  by  any  person. 

MISSOURI:  Health  maintenance  organizations:  Missouri  law  and  regula- 
tions do  not  provide  an  HMO  exemption.  CE  for  bed  category  change: 
Missouri  exempts  nursing  facility  conversion  of  beds  from  practical  to 
professional  levels  of  care  if  the  facility  meets  the  professional  level  licen- 
sure requirements.  Additions  of  new  health  services:  Missouri  exempts  ad- 
ditions of  home  health  services.  Other  specified  projects:  Missouri  covers 
pre-development  expenditures  exceeding  $150,000. 


1986]  CERTIFICATE  OF  NEED  1103 

MONTANA:  General:  Montana  CON  law  sunsets  July  1,  1987.  The  Mon- 
tana CON  statute  underwent  minor  amendment  in  1985.  Other  entities: 
Montana  covers  infirmaries,  e.g.,  facilities  located  in  a  university,  col- 
lege, government  institution,  or  industry  for  the  treatment  of  the  sick  and 
injured  on  an  inpatient  or  outpatient  basis.  Montana  also  covers  adult 
day  care  centers.  Other  specified  projects:  Montana  covers  expansion  of 
the  geographic  service  area  of  a  home  health  agency.  Other  entities,  per- 
sons, other  specified  projects:  Montana  covers  acquisition  by  any  person 
of  MME  in  excess  of  the  threshold  provided  such  an  acquisition  would 
require  a  CON  if  undertaken  by  or  on  behalf  of  a  health  care  facility. 

NEBRASKA:  General:  Nebraska  has  1122  and  CON.  It  elects  not  to  review 
under  1122  projects  not  reviewable  under  CON.  Addition  of  new  health 
services /annual  operating  cost  threshold:  Nebraska  covers  additions  of  new 
home  health  services  regardless  of  annual  operating  cost  and  additions 
of  other  services  in  excess  of  the  threshold.  Acquisition  of  existing  facil- 
ity: Various  types  of  acquisitions  of  facilities  and  ownership  interests  in 
facilities  are  covered. 

NEVADA:  General:  Nevada  statute  amended  1985.  Other  entitites:  Nevada 
covers  any  facility  providing  health  services  which  is  entitled  to  receive 
reimbursement  from  any  public  agency  as  a  health  facility.  Other  entities, 
other  specified  projects:  Nevada  covers  any  facility  which  acquires  medical 
equipment  with  a  cost  exceeding  the  MME  threshold.  CE  for  other 
specified  purpose:  Nevada  covers  CE  in  excess  of  $100,000  for  expansion 
or  consolidation  of  a  health  service.  Other  specified  projects:  Nevada  covers 
expansion  or  consolidation  of  health  services  exceeding  $297,500  annual 
operating  expenses.  Nevada  covers  conversion  of  an  existing  office  of  a 
health  practitioner  to  a  health  facility  if  the  establishment  of  the  offices 
would  have  exceeded  the  $100,000  CE  or  $297,500  annual  operating  cost 
threshold. 

NEW  HAMPSHIRE:  General:  New  Hampshire  CON  law  was  amended 
in  1985.  Other  entities:  New  Hampshire  covers  independent  diagnostic 
laboratories  as  health  care  facilities.  New  Hampshire  covers  ''mental  retar- 
dation facilities."  Bed  capacity  increases,  bed  category  changes:  New 
Hampshire  covers  increases  in  bed  capacity  or  changes  in  bed  category 
exceeding  ten  beds  or  ten  percent,  whichever  is  less,  in  a  five-year  period. 
Addition  of  new  services:  New  Hampshire  covers  addition  of  "special  in- 
patient services,"  including  but  not  limited  to  alcohol  and  drug  dependen- 
cy, psychiatric  services,  and  physical  rehabilitation.  Acquisition  of  existing 
facilities:  New  Hampshire  covers  transfers  of  ownership  of  health  care 
facilities  except  where  the  transfer  would  be  subject  to  the  provisions  of 
revaluation  of  assets  as  outlined  in  the  Federal  Deficit  Reduction  Act  of 
1984.  Other  entities,  persons,  other  specified  projects:  New  Hampshire 
covers  acquisitions  of  diagnostic  or  therapeutic  equipment  in  excess  of 
a  $400,000  threshold  by  or  on  behalf  of  any  health  care  provider. 


1104  INDIANA  LAW  REVIEW  [Vol.  19:1025 

NEW  JERSEY:  General:  New  Jersey  has  both  CON  and  1122.  Projects 
and  facilities  identified  in  Tables  may  be  covered  under  either  or  both 
programs.  Kidney  disease  treatment  centers,  ambulatory  surgery  centers, 
organized  ambulatory  health  care  facilities,  other  ambulatory  care  facilities: 
New  Jersey  covers  public  health  centers,  diagnostic  centers,  treatment 
centers,  rehabilitation  centers,  outpatient  clinics  and  dispensaries.  The  iden- 
tity of  these  facilities  is  not  further  defined  in  law  or  regulations.  The 
Tables  assume  kidney  disease  treatment  centers,  ambulatory  surgery  centers, 
and  organized  ambulatory  health  care  facilities  are  included  within  these 
terms.  Other  entities:  New  Jersey  covers  certain  bio-analytical  laboratories. 
CE  for  other  specified  purpose:  New  Jersey  covers  capital  expenditures 
in  excess  of  $150,000  for  facility/service  planning  and  any  capital  expen- 
diture which  will  result  in  a  bed  capacity  decrease.  Additions  of  new  health 
services:  New  Jersey  regulations  contain  a  comprehensive  list  of  new  health 
services  categories  subject  to  review  and  components  thereof  which  are 
not  subject  to  review  as  new  services.  Construction,  development,  or  other 
establishment  of  new  health  care  facility:  In  addition  to  coverage  of  con- 
struction, development,  or  establishment  of  a  new  health  care  facility. 
New  Jersey  expressly  covers  replacement  of  an  existing  bed-related  health 
care  facility,  establishment  of  a  bed-related  satellite  location  for  an  ex- 
isting health  care  facility,  relocation  and  replacement  of  an  existing  non- 
bed-related  health  care  facility  into  a  new  health  service  area  or  to  an 
area  that  results  in  problems  of  access  to  populations  historically  served 
by  the  facility,  and  establishment  of  a  non-bed  satellite  service  of  an  ex- 
isting health  care  facility  into  a  new  health  service  area.  Acquisition  of 
existing  facilities:  Acquisition  of  facilities  and  of  varying  types  and  degrees 
of  ownership  interests  in  health  care  facilities  are  covered.  Other  specified 
projects:  New  Jersey  covers  transfer  of  a  patient  care  service  in  whole 
or  in  part  to  another  corporate  entity;  addition  of  regionalized  services 
identified  in  Dept.  of  Health  planning  regulations;  addition  of  renal  dialysis 
stations;  and  addition  of  operating  rooms. 

NEW  MEXICO:  General:  New  Mexico  has  1122,  not  CON. 

NEW  YORK:  Home  health  agencies:  Coverage  limited  to  * 'public  and 
voluntary"  HHAs.  Ambulatory  surgery  centers  and  organized  ambulatory 
health  care  facilities:  New  York  covers  diagnostic  centers,  treatment  centers, 
rehabilitation  centers.  ASC  and  various  types  of  OAHCFS  would  appear 
to  be  covered  under  these  categories,  if  they  meet  organizational  and  other 
criteria  for  distinguishing  such  centers  from  the  private  practice  of 
medicine.  Acquisition  of  major  medical  equipment:  New  York  covers  ad- 
dition or  replacement  of  any  equipment  regardless  of  cost  utilized  in  the 
provision  of  therapeutic  radiology,  open  heart  surgery,  cardiac  catheteriza- 
tion, kidney  and  heart  transplant,  acute  or  chronic  renal  dialysis,  CT  scan- 
ners, burn  care,  and  extra  corporeal  Shockwave  lithotripters  that  will 
significantly  increase  the  capacity  of  providing  such  service.  Other  specified 


1986]  CERTIFICATE  OF  NEED  1105 

projects:  New  York  covers  a  change  in  the  method  of  delivery  of  a  licensed 
service  regardless  of  cost.  New  York  covers  addition  or  deletion  of  ap- 
proval to  operate  part-time  clinics.  New  York  covers  any  proposal  in- 
volving a  total  project  cost  exceeding  $10,000  or  an  increase  in  operating 
costs  by  a  medical  facility  that  has  been  determined  to  be  inappropriate 
or  for  which  there  has  been  a  determination  of  no  public  need  and  which 
is  identified  as  unneeded  in  the  state  medical  facilities  plan. 

NORTH  CAROLINA:  General:  North  Carolina's  statute  was  amended 
in  1985.  Hospices,  other  entities,  CE  for  other  specified  purposes,  other 
specified  projects:  North  Carolina  covers  local  health  departments,  but 
only  to  the  extent  of  covering  their  CE  in  excess  of  the  expenditure 
threshold.  North  Carolina  covers  construction,  development,  or  estabhsh- 
ment  of  a  hospice  if  the  operating  budget  exceeds  $100,000  or  if  there 
is  a  CE  in  excess  of  the  expenditure  minimum  by  or  in  behalf  of  the 
hospice.  No  other  hospice  or  local  health  department  projects  are  covered. 
CE  for  bed  capacity  increases  and  decreases:  North  Carolina  covers  CE 
in  any  amount  for  bed  supply  increases  and  CE  in  excess  of  the  expen- 
diture minimum  ($1,000,000)  for  bed  supply  decreases.  CE  for  changes 
in  bed  category:  North  Carolina  covers  CE  for  bed  category  changes  only 
if  they  involve  a  CE  in  excess  of  the  expenditure  minimum.  Other  specified 
projects:  Conversion  of  non-health  care  facility  beds  to  health  care  facil- 
ity beds  is  covered.  Other  entities,  other  specified  projects:  North  Carolina 
covers  acquisition  by  any  person  of  "major  medical  equipment"  that  in- 
cludes magnetic  resonance  imaging  or  lithotripters,  regardless  of  owner- 
ship or  location. 

NORTH  DAKOTA:  General:  North  Dakota's  statute  was  amended  in 
1985.  Home  health  agency:  HHA  coverage  Hmited  to  expedited  review 
of  establishment  of  new  HHA  or  expansion  of  geographic  area  of  service 
of  existing  HHA.  General  purpose  CE:  Capital  expenditures  for  site  ac- 
quisition are  exempt.  CE  for  service  additions:  North  Dakota  statute 
defines  "capital  expenditure"  in  such  a  way  as  to  incorporate  the  expen- 
diture threshold  into  the  definition.  Not  clear  if  coverage  of  capital  ex- 
penditures for  service  additions  intended  to  include  the  threshold.  Table 
assumes  it  does  not. 

OHIO:  General:  The  Ohio  CON  statute  was  amended  in  1985.  CE  for 
changes  in  bed  category:  Ohio  covers  any  redistribution  of  beds  by  ser- 
vice associated  with  a  capital  expenditure  in  any  amount  and  amounting 
to  nine  beds  or  ten  percent  of  bed  capacity,  whichever  is  less,  in  a  two- 
year  period.  CE  for  other  specified  purpose:  Ohio  covers  CE  for  decrease 
in  bed  capacity  of  more  than  nine  beds  or  ten  percent  of  bed  capacity, 
whichever  is  less,  within  a  two-year  period.  Bed  category  changes:  Ohio 
covers  redistribution  of  beds  by  service  involving  beds  registered  as 
psychiatric,  physical  rehabilitation,  alcohol  rehabilitation,  or  long-term  care. 


1106  INDIANA  LAW  REVIEW  [Vol.  19:1025 

Bed  relocation:  Ohio  covers  bed  relocations  from  one  physical  facility  or 
site  to  another  excluding  relocation  within  a  health  care  facility  or  among 
buildings  of  a  facility  at  the  same  location.  Addition  of  a  new  health 
service:  Ohio  covers  initiation  of  any  program  of  heart,  lung,  liver,  or 
pancreas  transplant,  without  regard  to  cost.  Other  health  services  covered 
if  they  exceed  annual  operating  cost  threshold.  Acquisitions  ofMME:  Ohio 
has  $200,000  threshold  for  acquisition  of  technologically  innovative  medical 
equipment;  $400,000  for  all  other  major  medical  equipment.  Other 
specified  projects:  Ohio  covers  change  from  one  category  of  health  facil- 
ity to  another. 

OKLAHOMA:  General:  Oklahoma  has  CON  and  1122.  Tables  show  CON 
coverage.  Not  known  if  1122  program  coverage  different.  Portions  of  the 
Oklahoma  CON  law  to  sunset  in  1989.  Other  entities:  Oklahoma  covers 
such  institutions  or  services  operated  by  the  federal  government  in  the 
state  as  may  be  authorized  by  the  U.S.  Congress.  CE  regardless  of  pur- 
pose/expenditure threshold:  The  expenditure  threshold  for  SNF/ICF,  and 
medically-oriented  residential  care  facilities  is  $150,000;  for  hospitals  and 
all  other  health  care  facilities  it  is  $600,000.  CE  for  bed  supply  increases 
and  decreases,  relocations  and  category  changes:  Oklahoma  covers  only 
SNF/ICF  and  medically-oriented  residential  care  facilities  under  these  forms 
of  coverage.  Bed  capacity  increases  and  decreases,  category  changes  and 
relocations:  These  forms  of  coverage  apply  to  health  care  facilities  other 
than  ICF,  SNF,  medically-oriented  residential  care  facihties.  Construction, 
development,  or  other  establishment  of  new  health  care  facility:  Regula- 
tions cover.  However,  current  statute  could  be  read  narrowly  to  cover 
only  for  SNF,  ICF,  medically-oriented  residential  care  facility. 

OREGON:  General:  Oregon's  statute  was  amended  in  1985.  Other  en- 
tities: Oregon  covers  college  infirmaries.  General  purpose  CE/ expenditure 
minimum:  Oregon  covers  expenditures  for  clinically-related  services  in  ex- 
cess of  the  lesser  of  $1,000,000  or  $250,000  plus  .5%  of  the  gross  revenues 
for  the  last  fiscal  year.  Site  acquisitions  are  exempt.  CE  for  other  specified 
purposes:  Oregon  covers  non-clinically  related  capital  expenditures  in  ex- 
cess of  the  general  purpose  CE  threshold.  Additions  of  health  services: 
Home  health  services,  residential  care  or  treatment  of  the  elderly  and 
residential  or  outpatient  services  for  alcoholism,  drug  abuse,  or  mental 
or  emotional  disturbances  are  exempt.  Oregon  covers  additions  of  all  other 
health  services  which  could  significantly  add  to  the  cost  of  patient  care 
or  compromise  quality  of  care.  With  several  exceptions,  Oregon  regula- 
tions define  new  services  with  annual  operating  expenses  exceeding  $340,000 
as  significantly  adding  to  patient  care  costs.  Other  entities,  other  specified 
projects:  Oregon  covers  acquisition  of  MME  exceeding  a  $1  million 
threshold  by  any  person. 

PENNSYLVANIA:  CE  for  bed  category  changes:  Pennsylvania  exempts 
bed  category  changes  within  levels  of  care  in  a  nursing  home. 


1986]  CERTIFICATE  OF  NEED  1107 

RHODE  ISLAND:  Other  outpatient  ambulatory  care  facilities:  Rhode 
Island's  coverage  of  organized  ambulatory  health  care  facilities  includes 
central  service  facilities,  treatment  centers,  diagnostic  centers,  outpatient 
chnics,  and  health  centers.  Other  entities:  Rhode  Island  covers  clinical 
laboratories.  Addition  of  a  health  service:  Rhode  Island  statute  provides 
for  coverage  of  addition  of  any  health  service  proposed  to  be  offered 
to  patients  or  the  public  by  a  health  care  facility  which  meets  criteria 
defined  in  state  agency  rules  and  regulations.  As  of  December  1985